Dow falls short of 14,000 but closes at highest level since 2007 [video chat]

NEW YORK -- The Dow Jones industrial average didn’t crack 14,000 on Tuesday but it nonetheless closed at its highest level in more than five years.

The Dow gained 72 points, or 0.5%, to finish at 13,954 Tuesday, just shy of a milestone not reached since October 2007.

The stock market’s slow, grinding march upward in recent weeks has been fueled by growing optimism now that Washington has defused the so-called fiscal cliff and investors know how the government will tax capital gains.

Analysts cite the fading alarm -- at least for now -- over the U.S. debt ceiling, the European debt crisis and the Chinese economic slowdown as reason for rising investment sentiment.

Fourth-quarter corporate earnings have also generally come in better than expected, and the housing market’s continued improvement has buoyed Wall Street.

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Economic data have been mixed, but reports on jobless claims, industrial production and the like have beaten expectations.

“All those things are a little better than investors thought or feared” before the end of the year, said Paul Zemsky, chief investment officer of multi-asset strategies at ING Investment Management in New York.

“Investors are perceiving that the economy is doing better -- that the worst days are behind us,” he said.

It helps, too, that investors have few places to put their money to work and reap meaningful returns.

The Federal Reserve has been pumping money into the economy to nudge investors into riskier assets like stocks. As interest rates have fallen to historic lows, investors have been searching for returns by gobbling up bonds issued by countries and companies with shakier credit.

Bond markets are showing signs of overheating, and investors are paying top dollar for lower and lower returns as billions have poured into bonds. A rise in interest rates could push investors to shift investments from bonds back into stocks, too.

And stocks are relatively cheap by comparison.

“They’re not screamingly cheap, but they’re certainly not overvalued,” Zemsky said.

The broader Standard & Poor’s 500 hit the 1,500 milestone last week. ING predicts the S&P; will end the year between 1,575 and 1,600.

As for the Dow, Zemsky predicted it would plow further towards 15,000, an all-time high, perhaps landing between 14,500 and 14,75 by year’s end.

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