U.S. stocks rallied to end higher on Friday after a stellar jobs report outstripped Wall Street expectations, showing sustained improvement in a labor market that has been spotty over the past few months.
Friday’s equity rally nudged the S&P 500 and Nasdaq Composite to close at all-time closing highs.
The S&P 500 index finished up 18.62 points, or 0.9%, to 2,182.87, marking the large-cap benchmark’s first record since July 22. Financials and technology stocks led the gains, up 1.9% and 1.2%, respectively, while defensive sectors such as utilities and telecoms lagged behind.
The Nasdaq Composite Index climbed 54.87 points, or 1.1%, to close at 5,221.12, for its first record in more than a year, when it finished at 5,218.86 on July 20, 2015.
The Dow Jones Industrial Average surged 191.48 points, or 1%, to finish at 18,543.53, as shares of Merck & Co. Inc. skyrocketed 10.4% to lead the blue-chip gauge.
For the week, the Dow industrials climbed 0.6%, the S&P 500 gained 0.4%, and the Nasdaq rallied 1.1%.
The U.S. economy added 255,000 jobs last month, which follows a stellar gain in June, demonstrating that the economy is still healthy, despite relatively muted gross domestic product. The unemployment rate was unchanged at 4.9% even as the labor-force participation rate edged up to 62.8%, suggesting the labor market is tightening.
Following the employment report, expectations that the Federal Reserve would raise rates in September, measured by federal-funds futures, doubled to 18% from 9% on Wednesday, according to the CME FedWatch tool, but are still very low.
“The jobs number coming in stronger than expected is breathing new life into the market, something to give it direction,” said Robert Pavlik, chief market strategist at Boston Private Wealth, in an interview.
With financial stocks leading the charge, Pavlik said the jobs number may push the Fed closer to a September rate increase, but he has some misgivings.
“There’s still a lot of August to go through,” Pavlik said, noting that the month has traditionally been one of the most volatile for stocks, especially with last year’s selloff. “At the same time, I think the Fed is going to feel a little more empowered.”
“Back-to-back strong jobs growth gives the Fed support to raise interest rates but does not make it inevitable,” said Kate Warne, investment strategist at Edward Jones, adding a rate increase in December is more likely than September. The probability of a rate increase in December rose to 46% from 32% Wednesday.
“We are still in the summer doldrums and in the absence of negative news, we would expect the market to grind higher,” Warne said.
In other economic news, the U.S. trade deficit jumped 8.7% in June to a 10-month high of $44.5 billion, reflecting the higher cost of oil and more imports of consumer goods such as cellphones and drugs.
Record levels and price-to-earnings ratios that are above historical averages have been keeping some experts cautious.
“Current multiples have surpassed anything that we have paid before and we are in the middle of earnings recession. A lot of optimism about future earnings is predicated on stable dollar and oil, neither of which has been stable lately,” said Steve Chiavarone, associate portfolio manager at Federated Global Allocation Fund.