Rate-Cut Hopes Fuel Stock Rally
It was another one of those days where bad news seems like good news to Wall Street. Stocks finished Friday on a strong note after a worse-than-expected U.S. jobs report for April increased hopes for more interest rate cuts.
"There's a growing feeling that the worst is over in terms of business. There's a general optimism out there that the Fed will move this economy along," says Larry Rice, chief investment officer at Josephthal & Co. Rice notes that stock valuations may be too high as investors recently have priced a second-half turnaround into the market. "We're a little bit premature in the cycle," he cautions.
Before the market opened, the government unleashed dismal data on payrolls in April. Initially, investors panicked and ran for the exits, thinking that the poor figures would thwart consumer spending. But the sentiment turned positive as the negative report raised hopes for more interest-rate cutting from the Fed.
U.S. non-farm payrolls declined by 223,000 jobs in April, which is the largest monthly decline in payrolls since February 1991. Manufacturing lost another 104,000 jobs, while the service sector lost 108,000. The unemployment rate rose to 4.5%, the highest since October 1998. According to Standard & Poor's economic research unit, this increases the chance that the Fed will cut short-term interest rates by 50 basis points.
"Essentially the trend of jobless numbers is such that it is likely to prompt the Fed to lower interest rates 50 basis points at the next meeting," says Alan Ackerman, market strategist at Fahnestock & Co. Before today's jobless data, most analysts had thought the Fed would lower rates by 25 basis points at the next policy-setting meeting.
Among today's stocks to watch, Internet consulting firm Sapient Corp. (SAPE ), cautioned that its earnings could be lower than Wall Street estimates and its revenue could be as much as 28% less than one year ago.
The Dow Jones Industrial Average tacked on 154.65 points, or 1.43%, to 10,951.30. The Nasdaq Composite index added 45.35 points, or 2.11%, to 2,191.55. Meanwhile, the broader S&P 500 gained 18.01 points, or 1.44%, to 1,266.59.
Treasuries finished mixed after an opening surge on the latest payroll data. Friday's employment report, added to Thursday's jobless claims data, spell hope for additional aggressive rate cuts from the Federal Reserve, in continued effort to boost the economy and avoid recession.
European markets ended mixed following the U.S. jobless data. In London, the Financial Times 100 ended up 104.50 points, or 1.81%, to 5,870.30. Germany's DAX Index ended up 49.11 points, or 0.81%, at 6,138.28. In France, the CAC 40 finished off 1.52 points, or 0.03%, to 5,455.55.
Japan's equity markets were closed in observance of Children's Day. In Hong Kong, the Hang Seng ended Friday down sharply, losing 327.15 points, or 2.38%, to finish the session at 13,390.99.
By Amy Tsao in New York