NEW YORK -- The stock market rally, powered by a drop in the unemployment rate to 7.8%, its lowest level since January 2009, boosted the Dow Jones industrial average to a fresh five-year high even as other benchmark indexes closed lower Friday.
A jobs report-driven rally lost steam in the afternoon but didn't prevent the Dow from closing up 34.79 points to finish at 13,610.15. The Standard & Poor's 500 index ended down 0.47 points to 1,460.93, and the tech-laden Nasdaq composite index finished down 13.27 points to 3,136.19.
The fact that the Dow clawed its way to another bull-market high signals that the market may not be a dead-end for profitable returns as many risk-averse investors believe, despite all the negative headlines that include Europe's debt woes, China's slowing economy and fears that the U.S. fiscal situation could worsen and thrust the economy back into recession.
"The fact that the market is hitting fresh five-year highs will remind people how incredibly well the market has done and that the equity culture is not dead," says Tim Fidler, portfolio manager at Ariel Investments. "It will most definitely catch the attention of people who have been pulling money out of the market."
Investors are still grappling with concerns about global growth, slowing earnings in the U.S. and fears that the economy will fall off a "fiscal cliff" if Congress doesn't act to avoid automatic tax hikes and spending cuts at year-end, says Fidler.
Job creation, while improving, remains less than robust, which is likely to keep the economy in slow-growth mode and make it more difficult for companies to generate blowout profits.
"There are a lot of questions surrounding the earnings power of U.S. companies," says Fidler, adding that many on Wall Street expect profit margins, which have been at record highs, to start to revert back to more normal, historical levels.
Fidler also says a lot of people on Wall Street question how legitimate today's low unemployment number really is.
"You have a number of emotions in the market today related to the drop in the unemployment rate to 7.8%, ranging from conspiracy theories to skeptics to true believers," says Fidler, referring to chatter on trading desks that the job numbers were in someway manipulated for political reasons as the presidential election nears.
The government reported that 114,000 jobs were created last month, which was basically in line with what analysts were expecting. The number of jobs created in July and August were also revised upwards.
Wall Street analysts polled by Reuters were expecting September payrolls to expand by 113,000, down from the upwardly revised 142,000 jobs added in August. They expected the unemployment rate to tick up from to 8.2%, from 8.1% in August.
"The number was not bad for stocks but it wasn't good enough to be a major, major market mover," says Mark Lamkin, CEO and chief market strategist at Lamkin Wealth Management.
Conspiracy theories became part of of Wall Street chatter Friday, with some traders wondering aloud whether the numbers were manipulated by the Obama administration to boost his election chances.
"These unemployment numbers are rigged," warned Gary Katlbaum, president of Kaltbaum Capital Management, in a research note to clients. "The 8% unemployment rate has been a headline number for the past two years, so it was imperative that this administration got it under that number before the election."
As for fundamentals, Lamkin says that while an unemployment rate below 8% looks good and makes headlines, the economy is still not generating the 200,000 to 250,000 jobs needed to spur economic growth. It will keep investor bullishness from getting overly optimistic, he says.
The jobs issue is critical to investors, not only because it offers a window into the economy's health, but also because the trajectory of the unemployment rate has political and policy implications. The health of the job market could influence whether President Obama gets re-elected or Republican challenger Mitt Romney wins the White House.
Lamkin says today's employment news from the Labor Department was a "debate and political campaign mover." He says the lowest jobless rate since Obama took office will give the president a boost, following a so-so performance in Wednesday's first presidential debate. Republican challenger Mitt Romney, however, will be able to jump on the fact that job growth is still tepid at best, Lamkin adds.
The monthly jobs report has taken on added significance for investors ever since Federal Reserve chairman Ben Bernanke last month specifically linked the duration of the central bank's easy-money policies to the health of the jobs market. Bernanke has said the Fed will continue to add stimulus to financial markets until the unemployment rate, now at 7.8%, comes down sharply and the economy is healthy enough to generate jobs more rapidly.
The September employment report isn't strong enough to cause the Fed to take its foot off the stimulus accelerator, Barclays analyst Michael Gapen wrote in a report. And that's bullish for stocks, as well.
"We don't see the sharp decline in the unemployment rate as changing the calculus for the Fed at this stage," Gapen noted. The Fed, he says, will continue to purchase $85 billion of long-term Treasury bonds and mortgage-backed securities each month.
The Fed's bond-buying program helps stocks because it lowers borrowing costs and injects billions of dollars into the financial system.
Also on Friday, due to fears that global economic growth is slowing, crude oil took a hit, closing down $1.84 to $89.87, a 2% drop for the day.
Adam Shell, USA TODAY
The Associated Press