Stocks rally despite jobs report

Stocks staged a big comeback Friday, erasing big losses after a brutal November employment report, as investors extended the recent trend of buying despite the bad news.

The Dow Jones industrial average (INDU) jumped 260 points or 3.1%. The Standard & Poor's 500 (SPX) index added 3.7% and the Nasdaq composite (COMP) gained 4.4%.

All three major gauges tumbled through the early afternoon, with the Dow losing as much as 257 points after the government reported the worst monthly job losses in 34 years. But stocks erased losses and pushed higher in the afternoon.

"The report this morning confirmed the fears that the economy is worse off than economists had expected," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "But we're kind of seeing the reaction today that we've seen over the last few days, where there's extremely negative news on the economy, yet the market manages to hold its own."

Stocks still ended lower for the week following Monday's steep selloff. On that day the Dow lost 680 points after the National Bureau of Economic Research (NBER) confirmed what many have long believed - that the economy is in a recession. The NBER put the start at December 2007.

In the week ended Wednesday, Dec. 3, investors pulled roughly $12 billion out of equity mutual funds, after putting $10.4 billion into funds in the previous week. Investors have cashed out of equity mutual funds in 16 of the last 18 weeks.

Jobs: Employers cut 533,000 jobs from their payrolls in November, the biggest monthly decline since 1974, and far more than the 325,000 cuts that Wall Street economists were expecting. Meanwhile, September's and October's job losses were revised up, bringing the three-month decline to 1.3 million, the largest three-month job loss total since World War II. (Full story)

"It's a disastrous report," said Stephen Stanley, chief economist at RBS Greenwich Capital. "The overall picture is the labor market is deteriorating at the fastest pace in decades."

So far this year, 1.9 million jobs have been lost, topping the 1.6 million lost in the 2001 recession.

Stanley said that it's clear that the fourth quarter is and will continue to be a dire period for the economy, with December job losses expected to be substantial as well. He said that the fourth quarter is likely to be the worst in the cycle, although the first quarter of next year will be pretty bad too.

"We're going through the capitulatory stage where everyone is pulling back very sharply," Stanley said. "We don't know when it's going to end, but it could last for a few more months."

He said that by around the second quarter of next year, the economy will start to stabilize, still contracting but at a slower pace. He doesn't expect any real improvement until later in 2009.

Although the United States has been in a recession since December 2007, the credit crisis has intensified this downturn, causing a series of bank failures and government bailouts as the financial markets were thrown into turmoil. That has caused an already weak jobs market to weaken further.

The unemployment rate, generated by a separate survey, rose to 6.7% in November from 6.5% in the previous month. It was short of the 6.8% economists were expecting, but still brought the unemployment rate to the highest level in 15 years.

The report is maybe one of the worst the Bureau of Labor Statistics has ever produced in its 124-year history, Commissioner Keith Hall told lawmakers Friday at a Joint Economic Committee hearing.

In other news, a record 1.35 million homes were in foreclosure in the third quarter, up 76% from a year ago, according to a Mortgage Bankers' Association report released Friday.

Stocks tumbled Thursday after AT&T (T, Fortune 500) and other corporations announced more than 20,000 job cuts, adding to worries ahead of the jobs report.

Company news: Executives from Detroit's Big Three automakers were back on Capitol Hill Friday, asking a House panel for a massive loan package to rescue their struggling businesses.

Executives from GM (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler testified before the Senate Thursday. The Big Three are seeking $34 billion in aid to rescue their struggling industry, up from an initial request of $25 billion last month.

Separately, GM said Friday it will lay off about 2,000 workers in the first quarter of next year.

Shares of Hartford Financial Group (HIG, Fortune 500) surged more than 102% after the insurer boosted its 2008 profit forecast and said that it has enough capital to get through further declines in the stock market. The stock had plunged 92% this year, as of the previous session's close, on worries that the company would run out of cash.

Many big financial stocks rallied, including American Express (AXP, Fortune 500), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).

Merrill Lynch (MER, Fortune 500) rallied after shareholders on Friday approved Bank of America's $21 billion purchase of the bank. The all-stock deal had initially been valued at $50 billion when announced in September, but had been revised lower after Bank of America's stock fell.

Market breadth was positive. On the New York Stock Exchange, winners beat losers seven to three on volume of 1.62 billion shares. On the Nasdaq, advancers beat decliners two to one on volume of 2.24 billion shares.

Bonds: Treasury prices slumped, raising the yield on the benchmark 10-year note to 2.70% from 2.56% late Thursday. The 10-year yield dipped below 3% last week for the first time since the note was first issued in 1962. Treasury prices and yields move in opposite directions.

The yield on the 3-month Treasury bill fell to 0.01% from 0.015% Thursday, near the 68-year low of zero hit last month. The bill is seen as the safest place to put cash in the short term. The low yield means investors would rather preserve cash despite little or no interest than risk it in the stock market.

Lending rates showed little improvement. The 3-month Libor rate held steady at 2.19%, unchanged from Thursday, according to Bloomberg. The overnight Libor fell to 0.28% from 0.52% Thursday. Libor is a key bank lending rate.

Other markets: In global trading, European markets tumbled, one day after the European Central Bank, the Bank of England and Sweden's Riksbank all lowered interest rates. Asian markets mostly ended lower although Hong Kong's Hang Seng managed to rise, gaining 2.5%.

The dollar gained versus the euro and the yen.

U.S. light crude oil for January delivery fell $2.86 to settle at $40.81 a barrel on the New York Mercantile Exchange, ending at a four-year low.

COMEX gold for February delivery lost $13.30 to settle at $752.20 an ounce.

Gasoline continued its fall to nearly four-year lows, with prices down 1.6 cents to a national average of $1.773 a gallon, according to a survey of credit-card swipes released Friday by motorist group AAA. Prices have been sliding for 2-1/2 months and have dropped more than $2 a gallon, or 54%.