Posted on: Sunday, April 4, 2004

Job uptick brightens week on Wall Street

By Meg Richards
Associated Press

NEW YORK — The striking jump in the number of jobs created last month provided Wall Street traders with some long-awaited reassurance that the economic recovery is sound. But it also stirred apprehensions about rising interest rates.

The Labor Department's report on Friday that companies hired 308,000 people in March far exceeded the expectations of analysts.

Magnifying the importance of the largest jobs advance in four years, readings for January and February were revised upward, bringing the monthly average for the first quarter to 171,000 new jobs.

To economists, that figure is a lot closer to the sort of labor market growth they'd hope to see in a normal recovery.

Most are looking for several months with 200,000 to 300,000 new jobs before they'll declare that the expansion is sustainable. With the latest increase, the last piece of the recovery puzzle finally seems to be falling into place.

"This number sets a very positive tone going into the (second) quarter," said Ken McCarthy, chief economist for Finance Investments in New York. "The fact that companies are willing to hire means they have a lot of confidence that their profits are going to continue to rise."

The breadth of the employment increase was also encouraging. Jobs were added to nearly every sector of the economy, notably in construction, retail and healthcare services. Manufacturing employment held steady — significant after 44 months of declines.

Bond prices sagged on the report, and yields on the 10-year note flew to 4.14 percent.

But stock prices soared as the data heightened anticipation among investors for first-quarter results.

Analysts have estimated first-quarter earnings growth of 17 percent for the Standard & Poor's 500 index. But Wall Street has grown increasingly anxious about future growth as consumer spending incentives — such as tax cuts and mortgage refinancings — start to fade and jobs remain scarce.

In the upcoming earnings season, corporate outlooks will be of great significance, said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. Investors will want to hear conviction from corporate management that demand is on the rise.

"The question investors have really been asking over the last month is: What is next?" Caffrey said. "The more important issue is not what happened in the first quarter, but is what happened in the first quarter sustainable?"

Overshadowing any gains is the prospect of higher interest rates. Sluggish job growth and stable inflation have allowed the Federal Reserve to hold off raising a key short-term interest rate from its current 45-year low. If the labor market improves dramatically, that could motivate the Fed to take action sooner.

Wall Street is fond of low rates because they increase corporate borrowing power. If rates go up, companies will have to pay more to service their debt, and that will dent bottom lines.

Some economists believe that the Fed won't raise rates until after the presidential election, or even until next year. Others believe that the latest employment figures open the door for an earlier hike.

If rates rise enough to hoist 10-year Treasury yields into the 5 percent range, investors might start moving money out of stocks and into bonds, eventually leading to slower profit growth for equities. That would probably take several consecutive quarters of rate hikes, however.

"Right now we're in a sweet spot, because everybody knows the Fed's on hold," McCarthy said. "One month's number is not going to change that, but what it does tell us is the economy's in great shape. And profits are rising. ... "So what could be better than that?"

The Dow Jones industrials ended last week up 257.62, or 2.5 percent, finishing at 10,470.59.

The Standard & Poor's 500 index added 33.75, or 3.1 percent, to close at 1,141.81.

The Nasdaq climbed 97.15, or 5.0 percent, during the week, closing Friday at 2,057.17.

The Russell 2000 index, which tracks smaller company stocks, closed the week 30.53, or 5.3 percent, higher, at 603.45.

The Wilshire 5000 Total Market Index, which tracks more than 5,000 U.S.-based companies, ended the week at 11,202.42, up 362.24 from the previous week. A year ago, the index was at 8,320.00.