Stocks Advance as Job Growth Retreats

A tepid jobs report lifts hopes about Fed policy, but wage pressures could hurt the bull case.
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The "fox-trot economy" is what Raymond James market strategist Jeffrey Saut likes to call the economy's trend over the past five years. "Two slow steps, two fast steps."

That description seemed appropriate Friday: December employment rose by just 108,000 compared with Wall Street economists' average forecasts of 200,000. But revisions to October's and November's numbers added another 70,000 payrolls, which means the shortfall is not as bad as it first appeared.

On average, the economy has added roughly 200,000 jobs monthly over the past two months, pointing to a solid recovery from the job disruptions caused by Hurricane Katrina.

If the economic tempo Saut describes continues, jobs could weaken again in coming months -- before rebounding again later, of course. All in all, the economic recovery from the 2002 recession has been tepid and has almost run its course, the strategist believes.

"This recovery has fallen woefully short of all typical post-World War II recoveries," Saut says. "We are losing high-paying manufacturing jobs and not gaining an equivalent in high-paying service jobs."

The jobs trend has helped keep inflation down for a number of years. Still, with the automobile industry in disarray and talks of cutting pensions at

General Motors

(GM) - Get Report

and elsewhere, loss of benefits may lead to demand for more wages. On Thursday, for instance,

IBM

(IBM) - Get Report

said it will stop contributing to employee pensions starting in 2008, instead putting funds in 401(k) plans, where employees must direct their own investing.

Even if employment growth has risen at a snail's pace, at some point the economy's motors will be running at maximum capacity, creating risks of overheating. And with the unemployment rate falling to 4.9% in December, the economy "is getting close to full employment," notes Joel Naroff, president of Naroff Economic Advisors.

"The number of suitable workers is becoming an issue for businesses and that tends to lead to the bidding up of wages," he wrote in a research note. "That is one of the Fed's inflation worries ... so the members will likely watch the wage and salary numbers closely."

Average hourly earnings were up 0.3% in December, above expectations for 0.2% increase. This also lifted year-on-year wage growth to 3.1%, its fastest rate since February 2003.

Still, what often matters for Wall Street is the expectations game. Since the minutes of the Fed's December meeting were released on Tuesday, bulls have taken for granted that the Fed will hike perhaps one or two more times at most, lifting the fed funds rate to 4.75%.

Risks were that a much stronger-than-expected jobs number would definitely keep the Fed in the game. This report wasn't it.

In reaction, the

Dow Jones Industrial Average

was recently up 46.99 points, or 0.43%, at 10,929.14; the

S&P 500

index was rising 7.05 points, or 0.55%, to 1280.53; and the

Nasdaq Composite

was up 12.26 points, or 0.54%, to 2289.13.

The market also was buoyed by strong December sales at electronics retailer

Best Buy

(BBY) - Get Report

. Goldman Sachs helped lift tech shares, boosting its price target on

Google

(GOOG) - Get Report

to $500 from $400 and on

Yahoo!

(YHOO)

to $50.

Only the bond market, it seems, was reflecting a bit more wariness. Both short- and long-term yields were moving higher Friday, reflecting a very slight rise in expectations that the Fed will continue to hike short-term rates being that the economy remains solid.

In recent action, the two-year note was down 1/32 in price while its yield, which moves inversely, rose to 4.34%. The benchmark 10-year Treasury bond was down 1/32, while its yield rose to 4.36%.

According to Miller Tabak, the market fully expects the Fed to hike rates at the end of January and sees a 56% chance that it will again lift rates at the end of March. That's up from 48% odds before the jobs report.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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