NEW YORK (Reuters) - The Dow Jones industrial average soared to a record closing high on Tuesday, breaking through levels last seen in 2007 and as investors rushed in to join the party in anticipation of more gains.
Signs of a strengthening economy, continued support from the Federal Reserve, and fairly attractive valuations compared to other assets have boosted the Dow by almost 9 percent so far this year. A strong reading in the services sector, which accounts for the bulk of economic activity, was the latest indicator of improving demand.
"I'm surprised at the speed of the gains, which have come at a pace that we can't annualize. But stocks are still not expensive, and we can expect to continue getting a reasonable advance from here," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Global Investments, who helps oversee $760 billion in assets.
Gains came across the board, with 10 of the Dow's 30 component stocks reaching new 52-week highs on a day when 456 securities hit new yearly highs on the New York Stock Exchange. The Dow Jones Transportation Average also closed at a new high after rising 1.5 percent.
About 71 percent of the NYSE stocks closed higher while 67 percent of Nasdaq-listed shares ended in positive territory. About 6.41 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, slightly below the daily average so far this year of about 6.48 billion shares.
About 16.9 million contracts changed hands in the U.S. options market on Tuesday, according to options analytics firm Trade Alert. The turnover consisted of 8.90 million calls and 8.01 million puts. The overall option turnover was in line with last month's daily average of 16.89 million contracts.
The blue-chip Dow's forward 12-month price-to-earnings ratio was at 15.87, compared with 16.99 during the 2007 highs, according to Thomson Reuters Datastream. The S&P 500's price-to-earnings ratio was at 13.5.
Outside the Dow, Google continued its gains with the stock rising 2.1 percent to close at $838.60, an all-time high for the Web giant. Google is the highest-priced stock in the S&P 500.
The Institute for Supply Management's services index showed growth accelerated in February to its fastest pace in a year. Still, some areas of the economy haven't recovered as well as equity prices have since the financial crisis. The unemployment rate is at an elevated 7.9 percent, far above the 4.7 percent rate at the time of the Dow's previous high.
Markets have shrugged off the stalemate between the congressional Republicans and the White House over automatic U.S. government spending cuts, known as the "sequester." Other recent headwinds, including political turmoil in Europe, have also been navigated without much pain, with investors using any decline as an opportunity to buy.
"The economy is still expanding and improving despite the risk of higher taxes and lower spending," McDonald said. "While you can never rule out a correction, we don't see the economy or the Fed getting in the way of the market."
Among Dow stocks hitting all-time highs on Tuesday were Walt Disney Co and 3M Co. All 10 of the S&P 500's industrial sector indexes rose, with tech shares among the day's gainers. Just two components ended lower - Coca-Cola and Merck & Co, while Alcoa Inc ended flat.
The Dow Jones industrial average shot up 125.95 points, or 0.89 percent, to close at 14,253.77. The Standard & Poor's 500 Index gained 14.59 points, or 0.96 percent, to 1,539.79. The Nasdaq Composite Index climbed 42.10 points, or 1.32 percent, to 3,224.13.
Qualcomm Inc rose 2 percent to $67.97 after the world's leading supplier of chips for cellphones said it was raising its quarterly cash dividend by 40 percent. BMC Software rose 3.7 percent to $42.32 and Micron Tech added 3.9 percent to $8.73.
Shortly after the opening bell, the Dow rose above 14,198.10, the intraday all-time high reached in October 2007, when the world was heading toward the financial crisis. The Dow's previous closing high was set on October 9, 2007, when it ended at 14,164.53.
On Tuesday, the Dow set an intraday all-time high at 14,286.37.
The broad benchmark S&P 500 is at a five-year high and about 2.3 percent away from its all-time intraday high of 1,576.09.
Equity investors have been welcoming signs of improvement in the U.S. economy, but a big part of the rally that has continued in 2013 without a significant correction is the result of the U.S. Federal Reserve's easy monetary policy and the near zero short-term interest rates since December 2008.
As the market is aware that the cheap money from the Fed would have to eventually end, more investors were growing cautious. While the CBOE Volatility Index, or the VIX, fell 3.8 percent on Tuesday, it is still above lows reached in February.
"It's clear the economy isn't ready to have the Fed leave," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York. "No one thinks we're going into a crisis like we did after 2007, but the sense of play is very telling. Even though people are in the market, they're very cautious and searching for yield.
"The caution is frustrated caution."
(Additional reporting by Doris Frankel; Editing by Jan Paschal)