Stocks Have Room to Rise Despite Job Lag

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The optimists believe this is true despite the fledgling economic recovery's missing ingredient to date: Jobs.


Many U.S. companies are beginning to prosper again after one of the worst slumps in profits in decades. This year, stocks, despite being buffeted by a jump in oil prices and a drop in the dollar, have risen a lot higher than experts forecast.


Surveys show investor sentiment has improved and more fund managers believe profits will rise. Wall Street experts say gun-shy investors, who feel they are not getting enough return on their savings, are ready to take a chance on stocks again.


Some skeptics believe stocks are overheated and the market may pull back in a temporary correction.


Technology stocks retreated sharply this week, with the Nasdaq on Wednesday racking up its biggest one-day percentage drop in about six months.


But Wall Street's bulls say the signs for corporate earnings are positive and stock prices should end the year higher, halting a 3-year slide. The Dow Jones industrial average(^DJI - news) is up 12 percent so far this year, while the Standard & Poor's 500 index (^SPX - news) has risen 13 percent and the technology-heavy Nasdaq has climbed 34 percent.


The U.S. economy emerged from recession two years ago.


But the recovery has shown a start-and-stop performance with scant improvement in the job market. Since March 2001, when the recession began, nearly 3 million jobs have been lost. Computer maker Sun Microsystems (Nasdaq:SUNW - news) and tobacco producer R.J. Reynolds (NYSE:RJR - news) are the latest to announce major layoffs.


But job growth following a recession has lagged the stock market's gains in the past. In the early 1990s, the improvement in the labor market lagged the stock market's gains by about 18 months, according to David Sowerby, chief market analyst at Loomis Sayles & Co., a money management firm. This time, the lag is about two years.


"We will create a significant number of jobs this time, but it is a delayed process," Sowerby says.

 

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STOCKS APPEAL


Better corporate profits are driving stocks higher, said Ned Riley, chief investment strategist for State Street Global Advisors.


"Earnings are coming in at a clip much improved over the second and first quarters," he said, adding that the number of companies warning that they will miss financial targets has fallen.


Other analysts expect the trend to continue at least through the end of the year.


"We continue to want to buy and own equities during the rally, which, in our view, should extend through the balance of the year. Moreover, we believe seasonal trends are likely to support year-end strength," Smith Barney strategist Tobias Levkovich wrote recently in a report to clients.


The stock market's gains are broadly based, says Sowerby of Loomis Sayles. The Wilshire 5000 Index, which includes small-, mid- and large-cap stocks, has climbed nearly 30 percent since stocks hit 2003 lows in March.





Individual investors are dissatisfied with low returns from stashing extra cash in money market funds. Short-term interest rates are at 45-year lows. With long-term rates starting to climb, people also are reluctant to put more savings into real estate.

"If I have cash to put to work, I would look to committing it to the stock market," Sowerby says.

State Street's Riley agrees.

Investors worried about having enough for retirement eventually will get over their risk aversion toward stocks, Riley says.

"They will realize that a return of 1 percent does not buy the retirement they had planned," he says.

Riley said he thinks more upside surprises will appear in earnings in coming weeks. But he conceded some investors are skeptical that stocks will continue to make gains.

Earnings reports for the third quarter will accelerate soon and are likely to surpass the gains of the previous two quarters, Riley said. Rising stocks have been signaling this trend for some time and now, "the actual results prove that the turnaround is real," he said

 

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JOBS IN SERVICES

Riley said the United States must face the fact that the loss of many manufacturing jobs through outsourcing is a longer-term structural issue.

On the other hand, service industries, including financial services and health care, have started to hire again, he said.

Wall Street powerhouses Morgan Stanley (NYSE:MWD - news) and Lehman Brothers (NYSE:LEH - news) reported stronger-than-expected earnings in the latest examples of the improved earnings trend.

Some companies whose profits have risen are sharing the largesse through dividends to shareholders, which provides additional economic stimulus. The impact of the $330 billion in tax cuts also is stimulating demand and will continue to do so, according to Riley. Taxpayers who did not adjust their payroll withholding will be due refunds from Uncle Sam in 2004.

To skeptics who question whether the recovery will be sustained, Riley says low interest rates and companies' dramatic increases in productivity should sustain the gains in corporate earnings.

"I think people are missing the forest for the trees," he said.

For the week, the tech-laden Nasdaq sank nearly 6 percent -- its biggest weekly percentage loss in about 17 months -- finishing at 1,792.07, based on the latest available figures. The blue-chip Dow Jones industrial average declined 3.4 percent to 9,313.08, while the broad Standard & Poor's 500 index lost 3.8 percent, ending at 996.85. (StocksView appears every Friday