NEW YORK--U.S. stocks could start this week with investors feeling a bit more optimistic about the economy, due to a stronger-than-expected jobs report, making further market gains more likely.
Friday's nonfarm payrolls report was the latest of the week's data to suggest the economy may not be headed for another severe downturn, as many investors have feared. All three major U.S. stock indexes rallied more than 1 percent on Friday, with the Dow Jones industrial average nudging back into the black for the year.
The Standard & Poor's 500 Index scored a gain of 3.8 percent for the week, marking its best week in eight, and starting September--typically the weakest month for the market--on a strong note. In contrast, for the month of August, the S&P 500 fell 4.7 percent.
"The data forces a re-evaluation of the underlying thesis of the economy, and how the stock market is priced," said Charles Lieberman, chief investment officer of Advisors Capital Management, LLC in Hasbrouck Heights, New Jersey.
"The employment report is really the keystone. If the economy is producing jobs, the thesis of a decline in the economy goes out the window," he said.
The economic calendar will be light this week, especially since it will be cut short by a long holiday weekend with the U.S. stock market closed for Labor Day on Monday. But the agenda will include the international trade deficit data, which investors will scrutinize for clues on spending. The latest weekly jobless claims numbers are due as well. High unemployment and weak consumer spending have been among the toughest hurdles to sustaining the economy's recovery from the worst downturn since the 1930s.
Though the stock market ended this week with gains, the S&P 500 was unable to break out of a trading range of between 1,040 and 1,130, and some analysts see that range-bound trend continuing.
"I think we're in rally mode. In no way do I see us going through new highs or breaking through the trading range, but I see strength after the holiday," said Alan Lancz, president of Alan B. Lancz & Associates Inc. in Toledo, Ohio. "We still see this as a two-steps-forward, one-step-back type market ... but we'll take what we can get."
For the week, the Dow Jones industrial average rose 2.9 percent, while the S&P 500 advanced 3.8 percent and the Nasdaq gained 3.7 percent. That's a promising start, but history shows that this month is not one that Wall Street's denizens will "Try to Remember", a la the iconic song from "The Fantastiks" of Off-Broadway fame.
September is typically the weakest month for stock market performance, according to the Stock Trader's Almanac. The S&P 500 has declined 0.7 percent on average during September in the years since 1950, the Almanac says. However, on the day after Labor Day, the Dow has risen in 12 of the last 15 times, the Almanac notes.
The Dow industrials ended Friday's session at 10,447.93, up 0.2 percent for the year. The S&P 500 and the Nasdaq wrapped up the week close to break-even for 2010; the S&P is off about 1 percent for the year and the Nasdaq is off 1.6 percent.
Friday's jobs report was the catalyst for a bullish end to the week for stocks because it showed that although overall payrolls shed jobs for the month of August, the decline was far less than expected. And providing a bright spot, private payrolls rose more than expected.
The silver lining in the cloud hanging over the U.S. labor market was the government's data showing 67,000 private-sector jobs were added in August, which exceeded economists' expectations. And overall, U.S. nonfarm payrolls lost 54,000 jobs in August--much less than the forecast for a drop of 100,000 jobs.
Analysts said the news gave a ray of hope for the recovery. Other data last week showed an unexpected rise in the Institute for Supply Management index on U.S. manufacturing, stronger-than-expected pending homes sales in July, and a second consecutive week of lower claims for initial jobless benefits.
The data means "we are probably not looking at a double dip," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.
This week's data includes reports on international trade on Thursday and wholesale inventories on Friday. A surge in imports dampened growth in the second quarter.
U.S. government data during the week is expected to show the international trade deficit narrowed somewhat to $47.2 billion in July, according to economists polled by Reuters, after rising to $49.9 billion in June, the highest since October 2008.
Analysts believe sluggish domestic demand should cause a moderation in the growth of imports in coming months, while they expect U.S. exports to strengthen. As a result, the trade gap should be less of a drag on the economy.
Initial jobless claims, also expected on Thursday, are seen dipping to a seasonally adjusted 470,000 for the week from 472,000 previously.
Wholesale inventories for July, due on Friday, are forecast to rise 0.4 percent, the Reuters poll showed, following June's gain of just 0.1 percent. That report also will shed light on wholesale sales, seen up 0.3 percent in July, following June's decline of 0.7 percent.