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Stocks rebound as jobs report boosts optimism on economy

July 05, 2013|By Andrew Tangel

NEW YORK --Stocks jumped 1% as the federal government reported the labor market was gaining strength, overshadowing fears of the Federal Reserve winding down its stimulus.

The Dow Jones industrial average gained 147.29 points to 15,135.84 at the closing bell on Wall Street.

The broader Standard & Poor's 500 index rose 16.48, or 1%, to 1,631.89. The technology-focused Nasdaq composite index was up 35.71 points, or 1%, to 3,479.38.

Investors feasted on a U.S. Labor Department report showing the economy added 195,000 jobs in June, higher than economists had predicted. The unemployment rate stood unchanged at 7.6%.

“That was a good jobs number," said Andy Brooks, head equity trader for T. Rowe Price. "We need people to be back to work, and over time that’s very good for the economy. That should be very good for corporate earnings.”

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Initially, the stock market didn't seem to know how to react to the jobs report Friday.

Futures implied a strong open before the opening bell. After a pretty strong start, stocks lost steam, and major U.S. indexes slipped into the red. Investors may have been spooked by a strengthening dollar and a surge in bond yields in anticipation of the Federal Reserve "tapering" its bond purchases later this year, Brooks said.

Analysts and traders said Friday's report seemed to bolster expectations that the Federal Reserve this fall will begin scaling back its massive stimulus that has fueled this year's stock market rally.

“The market is obsessed with tapering" of the Fed's bond-buying, said Jeffrey Cleveland, senior economist at the investment firm Payden & Rygel in Los Angeles.

The Fed's stimulus, known as quantitative easing, has been pumping $85 billion a month into the economy. By buying bonds, the central bank has pushed down interest rates and thus made riskier investments like stocks more attractive.

Some have likened the market's dependence to a drug addiction. That can lead to what Cleveland calls a sometimes perverse reaction in the stock market whenever good economic news is seen as leading to the Fed tightening its spigot of easy money.

Bond investors took Friday's jobs report as a sign of rising rates to come. The yield on the benchmark 10-year Treasury bond, which has jumped in recent weeks, continued inching higher Friday. The 10-year's yield hit 2.7% in midday trading, a level not seen since August 2011, according to Tradeweb.

The uncertain time frame for the Fed's scaling back of its stimulus has caused investors anxiety recently.

“The anxiety would be worse if we weren’t making progress,” Brooks said. “There’s a change coming," Brooks added. "Rates are going to rise. The Fed is going to do this tapering, and that means unemployment rates are coming down and that’s good for everybody.”

Starting next week, investors will watch for another sign of economic growth: corporate profits.

Publicly traded U.S. companies are due to kick off the second quarter's earnings season Monday, when aluminum giant Alcoa Inc. reports.

ALSO:

Stocks edge higher after June jobs report beats expectations 

Jobs data show wage gap between supervisors and employees

Strong jobs report has Fed on track to taper stimulus, analysts say

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