You'd hardly think a 7.9 percent unemployment rate and a negative GDP report would signal a Goldilocks economy and drive the Dow Jones industrial index over the 14,000 mark for the first time since October 2007.
But the Dow climbed Friday to 14,009 and closed in on the 14,164 peak of 2007, while analysts described a tantalizing environment for stock market bulls — a mixture of economic data that's not too hot and not too cold.
"Goldilocks is fighting off the bears for now," said BMO Capital Markets strategist Brian Belski.
In other words, investors see an economy that is still weak enough to prompt the Federal Reserve to continue the stimulus that makes investors crave stocks. But recent economic data on manufacturing, housing, jobs and consumer confidence also are strong enough to suggest an ongoing economic recovery and allay concerns of a dip back into recession.
Analysts have worried that the unrelenting five-week climb in the stock market, and a rise by about 7 percent, would be enough to send the market into decline. Typically after sharp, fast moves, stocks fall for a while. But on Friday, analyst Will Geisdorf of Ned Davis Research said he had to move away from such expectations because momentum in the market was too great to resist.
"You don't fight the tape," Geisdorf said. "That's the No. 1 rule at Ned Davis Research."
The underlying economic numbers are encouraging, but only moderately so, and since investors want the Fed to keep helping the economy, "moderate" is seen as good rather than discouraging.
The slight jump in January unemployment to 7.9 percent from the previous month's 7.8 percent was seen Friday as a hopeful sign. The jump happened because people feel more optimistic about the employment picture. Those who had been discouraged and not looking for work started to look again, so they were counted in the government's unemployment survey as unemployed. About 12.3 million Americans want jobs but haven't found them.
While that's a troubling number, analysts are focused on the positive. The government unemployment figures released Friday showed that jobs were underestimated in November and December. About 127,000 more jobs were created than originally thought. And last year, jobs grew by about 181,000 a month on average. That's not the strong growth that would be needed to bring unemployment down to 6.5 percent within a couple of years, but it is more than the 150,000 needed to absorb new workers into the workforce and provide enough jobs to slowly pick away at the unemployment rate.
Gluskin Sheff economist David Rosenberg calculates that if job growth continues at its recent pace, a 6.5 percent unemployment rate is five years away. While that may be upsetting to people looking for jobs, investors think it will keep the Federal Reserve stimulating — flooding the market with money that investors will put into stocks and commodities.
Meanwhile, investors are ignoring the gross domestic product numbers that showed the economy contracting last month. Many economists said the downturn was a fluke that underestimated the strength of the economy because most of the drag came from cuts in government defense spending, while the private sector provided strong growth.
"We think improving business conditions and the positive sentiment in financial markets should support the prices of industrial metals and crude oil, at least for the remainder of the first quarter and possibly through to midyear," said Capital Economics economist Julian Jessop. She sees signs of a Goldilocks recovery globally, although she says it's too soon to call it a certainty for China, or Europe and the U.S., as both struggle with government debt.
Investors worldwide, however, are feeling more bullish. JP Morgan strategist Thomas Lee thinks the stock market rally is maturing after the quick 7 percent climb since Dec. 28. But, he notes, "Maturing does not mean 'go to the sidelines,' and we still see further gains in the weeks ahead."
Lee has his eye on market bullishness because eventually he thinks that will make the market vulnerable.
He predicts the Standard & Poor's 500 will slide to 1,350 before midyear. It closed at 1,513 on Friday. Lee thinks people remain underinvested in stocks, which means there is room for them to be tempted to enter the market. After shunning stocks since 2008, they have put more money into stock funds over the past four weeks than for any comparable period since 1996.
Twitter @gailmarksjarvis
