Investors take sunny view of gloomy US jobs data

Washington, May 7: THE economic indicators are gloomily heading south. The stock market is cheerfully heading north. What gives?

Economic hopes took a hit Friday, when investors learned that April unemployment, at 4.5 per cent, was far higher than expected. Wages also were up more than expected, sparking worries on inflation. On top of that, President Bush’s spokesman said the White House feared that strong first-quarter growth numbers, which had helped to boost stocks, might have to be revised downward.

It sounded like the economy might be heading down again, and stocks initially fell Friday morning. But then, curiously, the market turned around and stocks put in a substantial gain.

Some attributed it to a renewal of the old bull-market mentality. Hopes spread that the Federal Reserve now will stimulate the economy further by cutting rates by yet another half-percentage point when it holds its next policy meeting a week from Tuesday.

But it is possible that an even simpler explanation is behind some of the buying: Over the past month, a lot of investors have begun to bet that the economy isn’t going to get much worse and may well entirely avoid a recession, defined as two consecutive quarters of economic decline. Given all of the job cuts announced in April, the reasoning goes, an uptick in unemployment isn’t a bad surprise at all. It is a sign that companies are taking their medicine and that the economy is hitting bottom. There are plenty of experts who think that is fool’s logic, that recession could be around the corner and that the market is headed down again. But that skeptical view is in the clear minority now. Expectations for technology stocks had fallen so low that the mere idea that the economy could be reaching bottom has been enough to give them a serious boost and help pull the entire market back up.

“I think that even a 5 per cent unemployment number is not so steep as to really affect the broad economy,” says Tim Morris, chief investment officer at Bessemer Trust in New York. “In a way, this is positive news because this is what companies had to do to get a handle on their earnings and margins. They had to attack the labour component of their cost structure.”

That helps explain why the tech group has been surging. On Friday, despite the negative economic news, the tech-led Nasdaq Composite Index jumped 2.11per cent, or 45.33 points, to 2191.53.

The Wall Street Journal