By Michael Wursthorn 

The Dow Jones Industrial Average closed at a new high Thursday for the first time since late January, a sign of investors' conviction in a booming U.S. economy.

The blue chips surged more than 250 points to cap a three-day run of gains, the latest leg of a nine-year rally that hurtled the index to its first record close since Jan. 26. The stock market's rise has coincided with a pause in the U.S. dollar's rally and a recent spike in government-bond yields, a signal investors are viewing next week's expected increase in interest rates from the Federal Reserve as a testament to the strength of the economy.

Investors are now grappling with the idea that stocks could move beyond the range many Wall Street analysts had expected at the start of the year. Thursday's rally pushed the Dow up 7.8% for the year, while the S&P 500, which also set a new record, has gained nearly 10% to 2930.78 -- putting it near the 2018 price targets of banks such as Goldman Sachs and Bank of America Merrill Lynch.

A strengthening U.S. economy is expected to keep the rally going, analysts and money managers said, and has been a key factor in helping investors look past the trade sparring between the U.S., China and others. Even with the unemployment rate at its lowest level in nearly two decades and economic output growing at the fastest rate since 2014, the economic outlook got rosier Thursday: Initial jobless claims, a proxy for layoffs across the U.S., fell to the lowest level since 1969, the Labor Department said.

"The good economic news has put us into a bit of a momentum streak," said Larry Peruzzi, managing director of international equity trading at Mischler. "And with bond yields going higher, people are willing to take more risk and put more money into the equity side."

The Dow industrials added 251.22 points, or 1%, to 26656.98. The S&P 500 added 0.8% and the Nasdaq Composite 1%.

Analysts credit the boom in U.S. growth to the tax overhaul passed last year. The changes, which included a cut to the corporate tax rate, sent profits sharply higher through the first two quarters of the year, and analysts expect third-quarter earnings to be robust as well.

S&P 500 companies are projected to grow profits by 19% from a year earlier in the third quarter, according to FactSet, after posting growth rates of 25% for each of the first two quarters of the year.

The expectation for strong profit growth is driving investors to continue buying shares of technology companies, a sector that includes some of the fastest-growing companies in the stock market, some money managers said. That helped push tech companies in the S&P 500 up 1.3% Thursday.

Shares of Apple added 0.8%, extending their gain for the year to 30%. Boeing and Caterpillar, which have both seen their stock prices sag under concerns about trade tensions, added 0.6% and 2.1%, respectively.

The blue-chip index is the last of the big U.S. benchmarks to eclipse its January record. Major indexes slumped into correction territory in early February and have slowly churned higher to top their previous highs.

While the strong economic growth has stoked stocks, bond prices have stumbled, sending yields higher. The 10-year yield, which sits at 3.076%, has climbed 0.222 percentage point in the past month and is on track to rise for a fourth consecutive week. September's jump in yields is the biggest since January.

The two-year Treasury yield, meanwhile, rose to 2.807%, the highest since June 2008.

Investors increasingly expect quickening growth to give the Federal Reserve sufficient reason to continue with its quarterly pace of interest-rate increases through the first half of next year. The market currently estimates a 94% chance of a rate rise at the Fed's meeting next week, according to Fed-fund futures tracked by CME Group.

Meanwhile, the U.S. dollar fell to its lowest level in more than two months, another sign that investors expect the U.S. to avoid a trade war. The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, dropped 0.4% to 88.87, its lowest level since early August. The measure is off more than 2% from last month's highs.

A weaker dollar eases pressure on multinational corporations because it makes products cheaper to sell abroad, while boosting the value of overseas earnings that are converted back to U.S. dollars. It also could offer some relief to struggling emerging-market countries that service their debt in U.S. dollars. The WSJ Dollar Index is up nearly 3.5% this year.

Still, trade tensions continue to linger in the background and have the potential to knock stocks off their highs if the U.S., China or other countries ratchet up their tactics, analysts said. So far, investors are optimistic that trade tensions will eventually cool, especially after the U.S. said it would stagger its latest levies on Chinese imports.

Citigroup said in a report to clients that a worsening trade environment represents "a material risk to growth into 2019." The bank lowered its forecast for global growth this year to 3.3%, the first downward revision since October 2017, with the same rate expected next year.

"I would keep a close eye on the trade negotiations with Canada and more importantly with China," said Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, a $3 billion wealth-management firm. "I don't think we can blow the all-clear sign until steps are in place to resolve trade concerns with China, which are now more of a threat than ever."

--Daniel Kruger, Ira Iosebashvili and Georgi Kantchev contributed to this article.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

September 20, 2018 16:35 ET (20:35 GMT)