Stocks Fall Despite Jobs Data

A stellar employment number is the latest blowout economic report to go ignored.
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Updated from 4:05 p.m. EST

Stocks lost ground Friday despite a very positive report on the U.S. labor market, as traders reprised their recent habit of selling strong economic news.

The

Dow Jones Industrial Average

closed down 47 points, or 0.5%, to 9810, while the

Nasdaq Composite

fell 6 points, or 0.3%, to 1971. The

S&P 500

lost 5 points, or 0.5%, to 1053. All three major averages began the session at or near multimonth highs.

The October employment report was far better than expected, with nonfarm payrolls jumping by 126,000, above consensus expectations of 55,000. In addition, the unemployment rate dipped to 6.0% from 6.1% in September. Economists had expected the unemployment rate to hold steady at 6.1%. The report also included a rise in the average workweek and a 0.4% jump in aggregate hours worked; both underscore strength in the labor market.

Also, September payroll gains were revised to 125,000 from 57,000. This is the first time in a year that payrolls have risen in two consecutive months, although economists (and policymakers) say gains approaching 150,000 are necessary to keep up with the growing U.S. labor force.

Friday's employment report was "exactly what the Fed has been hoping for, but

they will look for a return of pricing power before tightening monetary policy," said Richard Berner, chief U.S. economist at Morgan Stanley. Berner forecast the Fed won't begin tightening until the second half of next year.

Peter Kretzmer, senior economist at Bank of America, made similar observations Friday morning. "While this

employment report showed above-expectation gains in most areas, the Fed will almost certainly wait for several months before making a change in its risk assessments," much less the fed funds rate, Kretzmer commented. "Most

FOMC members see considerable slack in the economy, allowing a period of above-trend growth without fear of inflation," which is far lower than at similar points in past cycles.

The dollar lost ground vs. both the euro and yen, while the price of the 10-year Treasury bond was down 8/32, its yield rising to 4.44%. Also of note, the 2-year Treasury bond was only off 2/32 to yield 2.01%, reflecting Berner's view that the jobs report, "does not change the outlook for the Fed." The 2-year bond is more indicative of near-term Fed monetary policy, while the 10-year bond better reflects longer-term inflation and growth expectations.

Among individual stocks making moves,

Nvidia

(NVDA) - Get Report

closed up $3.58, or 19.7%, to $21.75. The company reported that it swung to a quarterly profit and said it is seeing improvement in gross margin. Third-quarter revenue was in line with estimates. Merrill Lynch promptly upgraded the stock to neutral from sell.

Also getting a boost from Merrill, Dow-component

Altria

(MO) - Get Report

shares rose $2.21, or 4.7%, to $49.51. Merrill analysts put the company on its focus list anticipating a possible spinoff of

Kraft Foods

(KFT)

, and raised its 12-month price target to $63 from $50. Kraft shares were up 45 cents, or 1.5%, to $29.80.

McDonald's

(MCD) - Get Report

October same-store sales surged nearly 8.4%, driven by a 15.1% gain in the U.S. and strong demand for new menu items. The Dow component's shares were up 3 cents, or 0.1%, to $26.01, near a new 52-week high.

BarnesandNoble.com

(BNBN)

shares surged 58 cents, or 25.8%, to $2.83 after parent company

Barnes & Noble

(BKS) - Get Report

announced plans to buy back its dot-com subsidiary. Nearly 24 million shares of BarnesandNoble.com have already traded hands, eclipsing its average daily volume by more than 23 million. Shares of Barnes & Noble were up 24 cents, or 0.8%, to $30.61.

After a strong week for homebuilders, Credit Suisse First Boston on Friday morning downgraded several big names in the sector due to valuation concerns. Recently, the S&P Homebuilders index was down 4.09%.

Cypress Semiconductor

(CY) - Get Report

was down 22 cents, or 1%, to $22.84, despite its announcement late Thursday that fourth-quarter earnings should be 12 cents a share, 2 cents above expectations.

Pixar

(PIXR)

said it earned 23 cents a share on a 70% year-over-year revenue decline, beating estimates by a dime. And

Activision

(ATVI) - Get Report

said it lost 11 cents a share, which was a penny better than forecasts. Pixar shares were up $1.53, or 2.2%, to $71.69, while Activision was up 61 cents, or 4.1%, to $15.57.

Overseas markets finished uniformly higher, with London's FTSE up 1.2% to 4377 and Germany's Xetra DAX up 1.3% to 3783. In Asia, the Nikkei closed up 0.7% to 10,629, and Hong Kong's Hang Seng was up 0.5% to 12,215.

Stocks finished the week up only slightly, despite encouraging signs from both the earnings front and economic releases. The Nasdaq led the way, rising 39 points, or 2%, to 1932 on the back of a strong third-quarter earnings from

Cisco

(CSCO) - Get Report

. The Dow finished the week higher by 8 points, or 0.1%, to 9801, and the S&P 500 was up 3 points, or 0.2%, to 1051.

Looking ahead to next week,

Dell

(DELL) - Get Report

will release earnings on Thursday and economic releases include retail sales and University of Michigan consumer confidence on Friday. It will be interesting to see if Dell's earnings can sustain the Nasdaq's recent outperformance, while retail sales and consumer confidence could offer some preliminary evidence of the return of pricing power, that Berner believes the Fed finds so important.

Bank of America's Kretzmer cautions that despite today's strong employment report, underlying economic risks remain. "There are signs that domestic demand has cooled considerably this quarter from the last," including recent auto and retail sales data, he said. "The Fed will want to see how the production side of the economy fares in reaction in coming months."