Stocks expected to 'melt up' on stimulus expectations

Poor jobs data heightens anticipation for more quantitative easing

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Convinced that the Federal Reserve and the European Central Bank are about to ride to the rescue, investors looked past the struggling economy on two continents Friday and pushed stocks to levels not seen since before the financial crisis started raging in 2008.

U.S. jobs numbers released Friday by the Bureau of Labor Statistics unnerved economists, who saw no sign of relief for people looking for work. But in the topsy-turvy way that investors respond to bad economic news, the Dow Jones Industrial Average finished the week at 13,306.64, or the highest level since December 2007. The Standard & Poor's 500 stock market ended the week at 1437.92, or its highest close since January 2008. Stocks are up more than 14 percent this year, and analysts say much of the climb has been built on expectations for stimulus in the U.S. and Europe.

With much of the eurozone in recession, and unemployment in the U.S. not budging, investors seemed to conclude last week that conditions are too bad for central banks in the U.S. and Europe to ignore.

The Federal Reserve meets Wednesday, and most economists hadn't been expecting an announcement about new stimulus, but the stark jobs picture Friday changed that.

"Payrolls disappointment seals the deal for Fed action next week," said IHS Global Insight economist Nigel Gault in a note to clients that was similar to those circulated by many economists. "Jobs growth was anemic, and even the drop in the unemployment rate was bad news because it happened for the wrong reason."

"It was a very weak report in all major aspects," said David Greenlaw, Morgan Stanley economist.

Unemployment did dip from to 8.1 percent from 8.3 percent, but there was nothing encouraging about it. "The drop in the unemployment rate occurred only because of a plunge in the labor force," Greenlaw said. To put it another way, people have been giving up looking for work.

Since there are heightened expectations that on Wednesday the Fed will announce stimulus in the form of quantitative easing, or bond buying, investors will be disappointed and stocks could fall if the Fed doesn't act then. But bullish investors are also encouraged by announcements from Europe that appear to show support for bond buying there. Such purchases are intended to bring borrowing costs down so governments can operate and stay in the eurozone.

On Wednesday, the German Constitutional Court is expected to rule on the legality of Germany participating in a bailout fund, which is considered a key to eurozone bailout plans.

"In the unlikely event that the court blocks the European Stability Mechanism, the market response is likely to be very negative," said Capital Economics economist Jennifer McKeown.

Yet JPMorgan strategist Thomas Lee sent a report to clients Friday encouraging them to buy stocks. He told them that he expects the stock market to "melt up," as opposed to melting down, up to Election Day.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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