Stocks Jump on Hopes for Pause in Rate Hikes

Stocks moved sharply higher Friday, pushing the Dow Jones industrial average to within 150 points of its all-time high, after a monthly employment report raised hopes that the Federal Reserve would suspend its campaign of interest rate hikes after one more increase next week.

The Labor Department reported that the U.S. economy added 138,000 jobs in April, substantially less than the roughly 200,000 predicted by many economists. At the same time, the government reported a bigger-than-expected 0.5% rise in hourly earnings.

The climb in wages fueled doubts among some that the Fed would stop after raising its short-term rate from 4.75% to an expected 5% next week. But that didn’t diminish their enthusiasm for stocks.

“The economy has been so good that even though rates are going up stocks are still going up,” said Jim Paulsen, chief investment strategist at Wells Capital Management.

The Dow Jones industrial average surged 138.88 points, or 1.2%, to 11,577.74. The blue-chip barometer is within 146 points of its all-time high of 11,722.98, set Jan. 14, 2000, just before stocks collapsed into the bear market that ended the late-1990s boom.

The Standard & Poor’s 500 index rose 13.51 points, or 1%, to close at 1,325.76. The Nasdaq composite index was up 18.67 points, or 0.8%, to finish at 2,342.57.

Bond yields fell as traders bet that the Fed would move to the sidelines. The 10-year U.S. Treasury note fell to 5.10% from a four-year high of 5.15% on Thursday.

Thomas McManus, market strategist at Banc of America Securities, says he doubts that the Fed will end its campaign of rate hikes for long, even if it does take a breather this summer. Wall Street, however, has its fingers crossed that the Fed will be done after next week, he said.

“The market wants to believe that a pause is not just a pause,” he said. “The market wants to believe that a pause is really the end of the tightening cycle.”

Art Hogan, market strategist at Jefferies & Co., said such expectations were unrealistic, pointing to the rise in wages.

“There’s a good possibility the Fed will take a pause, but I don’t think we’re done for the year,” he said.

Even so, excitement about galloping corporate profits is trumping inflation fears. S&P; 500 companies have notched double-digit gains for 11 straight quarters, Paulsen said.

Brian Wesbury, chief economist at First Trust Advisors in Lisle, Ill., said that based on strong corporate earnings, he believed that stocks were undervalued by 25%, on average.

In the first quarter, 69% of companies beat profit estimates, he said, compared with a historical average of about 55%.

Rates have room to climb higher without endangering stocks, Wesbury said. From 1995 to 1999, the market surged even as the federal funds rate averaged 5.4%.

“This tremendous profit growth has created value in the market that has yet to be recognized by investors,” Wesbury said.

As they have several times this year, the Russell 2,000 and the S&P; 600 indexes of small companies set new closing highs. The Russell 2,000 added 7.11 points, or 0.9%, to 781.83, and the S&P; 600 gained 4.10 points, or 1%, to 404.47.

But the larger percentage gain in the Dow was “a signal that perhaps the underperformance of the large caps is behind us,” McManus said.

In other market highlights:

* Crude oil futures edged up after falling nearly $5 a barrel over the previous two days. A barrel of oil added 25 cents, to $70.19, in New York trading.

* Gold futures continued climbing, adding $8 an ounce to a 25-year high of $682.20. Gold jumped $30.40 for the week. The euro rose against the dollar, to $1.274 from $1.272 on Thursday.

* Mortgage lenders gained on prospects that interest rate hikes may be nearing an end. Countrywide Financial of Calabasas, the biggest mortgage lender, rallied $1.48 to $41.38. Fannie Mae, the largest source of money for mortgages, added 99 cents to $51.41.

* Boeing climbed $1.83 to a high of $88.47. Its shares may reach $97 within 12 months, up from a prior estimate of $85, Merrill Lynch analyst Ronald Epstein wrote in a note.

* Caterpillar, the best performer in the Dow average this year, climbed $1.17 to a record $79.98. The maker of earthmoving equipment last month posted a 45% gain in quarterly profit and boosted its forecast on higher prices and sales of gas-drilling machinery. The stock has rallied 38% in 2006.

Bloomberg News was used in compiling this report.