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Bouncing Stocks Face Hurdle

Liz Rappaport

Look Ma, we can rally.

Proving that Tuesday's bounce was no fluke is what Thursday's stock market action was all about, says Randy Diamond, trader at Miller Tabak. He adds that relatively light trading volume also suggests that many market participants are on the sidelines waiting for Friday's nonfarm payrolls report from the Labor Department.

Indeed, the rally couldn't have been based on economic data. More mixed messages poured in Thursday. Retail sales in February were weak overall, but retail stocks rallied, and the Federal Reserve reported that household net worth in the fourth quarter jumped $1.4 trillion to a record $55.6 trillion.

Weekly initial jobless claims were lower than expected, but traders are prepared for a weak payrolls report on Friday. Lastly, rumors swirled about mortgage lender New Century Financial(NEW Quote) seeking Chapter 11 bankruptcy protection.

The Dow Jones Industrial Average added 0.6% to close at 12,260.06 but finished about 43 points lower than its intraday peak. The S&P 500 gained 0.7% to close at 1401.77, while the Nasdaq Composite gained 0.6% to close at 2387.73.

New Century fell 25% on the day, while other mortgage lenders Accredited Home Lenders(LEND Quote) and Countrywide Financial(CFC Quote) slid 2.4% and 1.1%, respectively.

Leading the Dow upward was a 3.1% advance in AT&T(T Quote) after an analyst upgrade. Verizon(VZ Quote) added more than 2% on news that Internet phone company Vonage (VG Quote) was ordered to pay $58 million to Verizon for patent infringements. Vonage fell 3.8%.

The retail sector was strong despite an overall slower-than-expected start to the spring shopping season. Companies blamed the weather for weak same-store sales in February as Thomson Financial's index of same-store sales rose 2.6% vs. expectations for a 3% rise. And 61% of retailers missed estimates, reported Thomson.

Weak numbers came in from discount stores, while luxury stores fared better. Wal-Mart(WMT Quote) and Costco(COST Quote) fell 0.1% and 3.3%, respectively, while high-end stores Nordstrom(JWN Quote) and Coach(COH Quote) posted better-than-expected sales and saw their shares jump 4.5% and 2.2%, respectively. The S&P Retail Index rose 1.1%.

The subprime meltdown seems largely priced into the stock market at this point, as does some consumer weakness in the less affluent population.

But a serious drop in employment prospects is a bit off the radar of most traders. While most market participants now accept that the economy will grow at a below-trend pace in the next couple of quarters, the strong labor market has been held up as the safety net -- the factor that keeps the bottom from falling out.

Analysts believe Friday's payrolls report will show that 95,000 new jobs were added in February.

"The markets expect that if the jobs report surprises, it will do so on the downside," says John Lonski, chief economist at Moody's Investors Service.

A print of 50,000 new jobs would not "roil the markets," because recent volatility in the report has led traders to price in a wide margin of error, says Diamond.

"Below [50,000], and the fear of a slowing economy would put massive downside pressure on the dollar and could weaken stocks sharply and even widen credit spreads," says Diamond.

Wednesday's ADP National Employment Report showed that 57,000 jobs were added in February. The report has recently been improved but thus far has a relatively weak track record for correlating to initial payrolls estimates.

Perhaps the big question mark for the jobs report is the manufacturing sector, which continues to lose ground, particularly in certain regions.

While the Federal Reserve said in its beige-book report Wednesday that "manufacturing activity was steady or expanding in most districts," the depression-addled state of Michigan stands out like a sore thumb.

The Detroit Free Press reported Thursday that Michigan still has the highest unemployment rate in the country -- at 6.9%. Wednesday the paper reported that workers asked Michigan Governor Jennifer Granholm to declare an economic state of emergency, and the paper also noted a surge in foreclosed homes up for auction.

The national unemployment rate is 4.6% but is expected to tick up to 4.7% as of Friday morning's report of February, according to consensus estimates.

After peaking in 1998, manufacturing employment has slid 20%, says Moody's Lonski. "Make no mistake, manufacturing jobs will continue to leave the United States to cheaper countries abroad."

So while Mom may be proud today, the more impressive test to pass comes tomorrow.