Closing Market Report

Star-Bulletin news services Saturday, January 10, 2004

Market loses early
’04 gains on sluggish
hiring report

NEW YORK >> The confidence that has been so contagious among investors just hasn't caught on with employers.

The Labor Department's December report issued yesterday showed that employers are not quite as optimistic as Wall Street has been about what's ahead in the coming year. And so, while lower hiring levels may be a key factor in the strong profit reports investors are expecting, the job data left investors feeling a little tentative.

Less than a week old, the bull market of 2004 succumbed to the uncertainty in a hurry. The Dow Jones industrial average fell more than 130 points yesterday, wiping out most of early January's gains.

Whether that slide proves shortlived will depend largely on whether companies fulfill the market's optimistic profit forecasts for the fourth quarter.

"We'll certainly get some good news there," said Chuck Hill, director of research at Thomson First Call, which tracks Wall Street profit forecasts. Based on the latest projections and some early results, the companies in the Standard & Poor's 500 index are expected to show 22 percent growth in profits compared with the final quarter of 2002."

"We're going to have the best earnings growth in 10 years," said Hill. But, he cautioned, "It's not sustainable."

And while some marquee names such as Intel Corp. and General Electric Co. are slated to report their fourth-quarter results in the coming week, the reporting season won't kick into high gear until the following week.

In the meantime, investors will be left to ponder the ramifications of the employment report, which actually may say a lot more about how strong corporate earnings will be this year than in the final months of 2003.

On its surface, the report appeared encouraging, showing that unemployment dropped to a 14-month low of 5.7 percent in December. However, the national roll call of workers showed a paltry net gain of just 1,000 jobs.

So rather than an upswing in hiring, the drop in unemployment actually signaled a collective burst of frustration: More than 300,000 people gave up their search for jobs, and therefore were no longer counted as unemployed under the government's method of calculation.

Economists worry that such pessimism will translate into tighter consumer purse strings. Those not working stop spending from savings to maintain the same lifestyle, and their family members turn more cautious with their wages.

"Neither business nor potential employees have confidence in the economy," said Sung Won Sohn, chief economist for Wells Fargo & Co. "When businesses need help, they tend to rely on temporary help." As such, "People in the labor market don't seem to have a lot of confidence in the economy and the job market," he said.

The corporate frugality behind all this, driven by fierce competitive pressures at home and abroad, helped fuel the rebound in company profits and the stock market in 2003, forcing businesses to boost productivity.

But cost-cutting can only go so far, and with waning optimism in the labor market, the recovery could be undermined by weakening consumer confidence.

"Hopefully, employment gains will be much healthier during the second half of the year. By then this recovery will be three years old, persuading businesses to start hiring more people," said Sohn.

Despite yesterday's decline, all the major indexes were up for the week. The Dow, which had its seventh straight weekly advance, rose 49.04, or 0.5 percent, closing at 10,458.89.

The Nasdaq composite index was up 80.24, or 4 percent, at 2,086.92, its third straight up week. On Thursday, the Nasdaq also had its first close above 2,100 in 2 1/2 years.

The Standard & Poor's 500 was up for the seventh straight week, rising 13.38, or 1.2 percent, to 1,121.86.

The Russell 2000 index, which tracks smaller company stocks, ended the week up 14.35, or 2.6 percent, closing at 575.20.

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