International Markets: New York-Stocks up despite setbacks

THE WORLD'S largest sneaker company and biggest toy retailer both said last week earnings would fall short of expectations. The world's biggest corporate merger fell apart. Interest rates rose day after day.

Yet instead of dramatically undermining US stocks, these events provided the backdrop for the market's best month since July. Investors see more gains ahead.

"The path of least resistance for stocks is still up," said Robert Streed, a money manager with Northern Trust in Chicago.

This path is being paved by some $17bn (pounds 10.5bn) invested in stock mutual funds this month. More important may be expectations among investors that stocks will deliver outsized gains for the fourth year in a row.

"If the market is going up, just buy it," said Timothy O'Grady, a money manager at First Capital Group. The Dow Jones Industrial Average gained 7.4 per cent in February, and set records for the first time since August. The Standard & Poor's 500 Index rose 7.0 per cent, and the Nasdaq Composite Index rallied almost 10 per cent.

Among recent news the market all but ignored in recent days: Toys "R" Us warned that quarterly earnings will fall short of expectations, mostly because of higher promotional spending during the holiday season. Nike said its quarterly results will fall short because retailers marked down its slow-selling athletic shoes and ordered fewer shoes.

Drug stocks fell after news that the negotiations broke down between Glaxo Wellcome and SmithKline Beecham. Yet for the week, drug stocks, as measured by the Amex Pharmaceuctical Index, are higher.

Amidst uncertainty, investors say they're willing to pay a premium for predictable earnings, which pharmaceutical companies historically have delivered. "With the market at a high level, you're willing to pay more for safety," said Eli Salzmann, director of research at Lord Abbett.

Many investors are relieved that the economic crisis in Asia has done less damage than they expected to companies. Earnings in the most recent quarter rose a respectable 11.3 per cent among the companies in the Standard & Poor's 500 Index, up from 6 per cent a year earlier.

US bonds are not doing as well. They posted their first monthly drop in six months during February as expectations evaporated for a Federal Reserve interest rate cut soon.

Yet there's a silver lining. For some investors, the decline has only made bonds that much more attractive because there's no evidence inflation is poised to quicken. That makes real yields - calculated by subtracting the inflation rate from actual yields - the highest they've been since August.

Copyright: IOS & Bloomberg