News of strong job growth, a three-year low in unemployment and other positive developments Friday pushed the Dow ahead 156.82 points, or 1.23%, to 12862.23, its first triple-digit gain since Jan. 3. The blue-chip index would have to rise just 10% to reach its record close of 14164.53, hit Oct. 9, 2007.
The Nasdaq Composite Index, dominated by surging technology stocks, jumped 1.61% to 2905.66, its highest close since December 2000, as hopes spread that global growth would be strong enough to boost demand for technology gear.
Financial and industrial stocks also posted strong gains on those same economic hopes. Utility stocks, whose dividends make them good investments in a weaker economy—and which led the market amid economic doubts late last year—were among Friday's weaklings.
The Dow's surge is a sign of the extent to which investors have put aside the global fears that gripped them last summer. Then, the Dow fell almost 20%, which would have marked a new bear market.
"People are deciding that it may not be the end of the world after all. They are getting used to the idea that there are some European countries that are struggling but that the U.S. is continuing to plod along," said Janna Sampson, co-chief investment officer at OakBrook Investments, which oversees $2.6 billion in Lisle, Ill.
Since Lehman collapsed in September 2008, stocks have often been driven by raw fear of financial meltdown rather than by economic fundamentals. Stocks plunged when fears were strong. They recovered only when fears quieted enough for investors to focus on the fact that bargain-basement interest rates and government stimulus were helping economic growth.
In 2011, the panoply of fears erupted again, including the risk of a European debt meltdown, a "double dip" by the U.S. into another recession or a sharp slowdown in China. But just when a bear market seemed inevitable, the European Central Bank began loosening monetary policy. It eventually launched a new three-year lending program to support European banks. The Federal Reserve committed itself to keeping interest rates low and hinted that it would resume spending tens of billions of dollars buying bonds if needed.
As the Fed reiterated its intentions and the ECB pursued its relaxed monetary policies, businesses have resumed investments, consumers have bought more goods, and investors have bid stocks higher. The upbeat employment news could extend that trend, said James Paulsen, chief investment strategist at Wells Capital Management.
" 'Fear' has arguably been the biggest hurdle to stronger economic growth so far in this recovery and the prospect of rising confidence might be the best sign yet that the U.S. recovery will sustain and broaden,' " he wrote in a report to clients.
A quiet U.S. economic recovery, with slow growth and low inflation, is a fertile background for stock gains. Unemployment remains high, but as long as it doesn't hold back profits, it helps keep down inflation, which in turn keeps interest rates low and provides support to stocks.
That said, fears of a euro-zone meltdown or a problem in China remain could surge back at any time. The anxieties continue to keep many individuals away from stocks, leaving the market firmly in the hands of professionals.
On Friday, besides the U.S. jobs report, investors learned of strength in the U.S. service sector and in a gauge of European manufacturing activity.
European borrowing costs have been steadily declining. Corporate news also has been upbeat, with January auto sales surprisingly strong and Facebook Inc. choosing this time for its big initial public offering.
Stock markets in Britain, Germany and France all rose, finishing the week at their highest levels since the summer. Industrial commodities such as copper were up, as was oil, which had been down earlier in the week. Treasury bonds, which had been a refuge for nervous investors, fell in price, sending their yields higher.
Despite stock gains of well over 20% since the autumn lows, many investors believe stocks remain reasonably priced and have room to rise so long as the worries about a European meltdown remain in the background.
The broader Standard & Poor's 500-stock index, which rose 1.46% Friday to 1344.90, is up 6.9% so far this year, its best start to a year since 1987. It still hasn't returned to its own post-Lehman high, however.
Stocks in the S&P 500 are trading at around 13 times forecast 2012 corporate-profit levels, well below the price-earnings multiples of 16 and more that are common when markets are rising. It would be normal for stocks to pull back now, as investors view the breakthroughs for the Dow and Nasdaq as a good time to cash in some profits.
But analysts say they aren't yet seeing the kind of excessive investor optimism that can be a sign of more serious stock pullbacks to come. On Friday, economists were warning that 2012 could be a bumpy year for economic growth and the stock market.
"While today's data is unequivocally good news, it's too early to declare 'mission accomplished,' " said Neal Soss, Credit Suisse's head of U.S. economics, in a report to clients on Friday.
Chief Economist Don Rissmiller of Strategas Research Partners said that the U.S. economy, and housing in particular, remain weak enough that the Fed still should be preparing to launch a multibillion-dollar bond-buying program.
The months heading into presidential elections historically have been unsettled ones for stocks. If the Fed were to signal that it no longer views the economy as weak enough to merit a bond-buying effort, that also would be bad for stocks. But a Fed program of bond buying would provide billions in new money for financial markets, which in the past has been very good news for stocks.
All of this left many investors believing that the environment isn't bad at all for stocks, as long as those primal fears don't start looking again as if they are going to come true.
Source:The Wall Street Journal