Wall Street rallies on; are investors leaving bonds for stocks?

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Wall Street closed broadly higher for a second straight session Thursday, on the heels of healthy November retail sales reports and a surprising jump in October pending home sales.

The data keep adding up to a strengthening economic recovery, even if many Americans understandably don’t feel that way. The next big data point: The November employment report, due Friday morning.

In active trading, the Dow Jones industrial average (charted at left) rose 106.63 points, or nearly 1%, to 11,362.41. That left it just 0.7% below its two-year high of 11,444.08 reached Nov. 5.

The Standard & Poor’s 500 index and the Nasdaq composite index got even closer to their recent two-year peaks: The S&P rose 1.3%, to 1,221.53, or 0.4% below its Nov. 5 high of 1,225.85. The Nasdaq index jumped 1.2% to 2,579.35, a hair’s breadth from its Nov. 8 peak of 2,580.05.

Meanwhile, indexes of small- and midsize stocks this week finally surpassed their highs reached before the spring market plunge.

The Russell 2,000 small-stock index rose 1.1% to 751.20 on Thursday, its best level since September 2008. The index on Tuesday climbed past its 2010 closing high of 741.92 set on April 23.

Year to date, small stocks are far in the lead in the market derby: The Russell index is up 20.1%, compared with a 13.7% gain for the Nasdaq, 9.5% for the S&P 500 and 9% for the Dow.

Besides the economic data, U.S. stocks were helped Thursday by rallies in European bonds and stocks, as concerns about the continent’s government-debt crisis eased.

Something else may be underpinning equities: As the economic numbers look better interest rates are rising in the bond market, pushing bond prices lower. That may be driving some investors out of bonds and into stocks.

The five-year Treasury note yield rose to 1.67% on Thursday, up from 1.64% on Wednesday. The yield has soared from 1.03% on Nov. 4 -- the day after the Federal Reserve formally committed to ramping-up its Treasury purchases in an attempt to keep rates suppressed.

The 10-year T-note yield (charted at right) rose to 2.99% on Thursday from 2.96% on Wednesday. It’s now at its highest level since late July.

You have to wonder where Treasury rates would be if the Fed wasn’t buying bonds.

-- Tom Petruno