NEW YORK — Wall Street has no doubt that the stock market and the economy will eventually regain the kind of strength they enjoyed for much of the last decade.
The question is when.
Investors and market observers won’t like the answer from this past week: Longer than they had thought, perhaps not even this year.
A spike in unemployment and warnings from companies of weak second-quarter and full-year earnings bode ill for a near-term recovery. Indeed, analysts say, the economy could still be recession-bound and that stock prices might have further to fall.
“Listen, we are in for a grind here,” said Charles White, portfolio manager at Avatar Associates in New York. “It doesn’t mean stock prices have to go materially lower, but it means that the catalyst for being off to the races is a ways off.”
Investors were disturbed this past week by two labor reports that quelled some of their resurgent optimism and reawakened worries about recession.
The market still managed to move sharply higher on Friday – with the Dow Jones industrials reaching a closing high not seen since early February – but only because investors believe the economy is so weak that the Federal Reserve will have no choice but to deliver a big interest rate cut when its policy makers meet May 15.
The most troubling news about the economy came Friday when the Labor Department said the unemployment rate jumped to 4.5 percent in April, its highest level in 2 years. The report also said businesses cut their payrolls by the largest amount since the recession in 1991.
The data followed Thursday’s news that first-time claims for jobless benefits reached a 5-year high the previous week.
Employment reports are watched closely because consumer spending, which accounts for two-thirds of the U.S. economy, is directly tied to whether Americans are working and feeling secure about their jobs.
“We have known for some time that we were in a manufacturing (and technology) recession and a profits recession; now it threatens to spread to the consumer,” said Robert Stovall, market strategist for Prudential Securities.
There’s no mistaking now, he added, that many companies have suffered as the economy has slumped.
One example from the past week was Newell Rubbermaid, which warned of poor profits for the remainder of the year after missing first-quarter expectations. The housewares and consumer products maker also said it will slash 3,000 jobs, or 6 percent of its workforce.
The weak labor data and corporate warnings overshadowed a strong economic report the previous week, when the Commerce Department said the gross domestic product grew at an annual rate of 2 percent in the first quarter.
“The GDP report was just a false cue. It seemed to be an aberration of a trend,” said A.C. Moore, chief investment strategist for Dunvegan Associates in Santa Barbara, Calif. “The economy is pretty weakened here.”
The White House acknowledged as much on Friday as press secretary Ari Fleischer said the Bush administration believes it’s “entirely possible” that the government’s recent 2 percent reading for the nation’s first-quarter economic growth will be revised downward.
Friday’s rally aside, so long as there’s proof that the economy and business climate is quite weak, the market won’t be able to maintain its upward momentum, said White, the portfolio manager.
“The market has been going up recently on the hopes and dreams of a recovery by the fourth quarter,” White said. “It was way too soon to discuss recovery.”
If history repeats itself, however, stock prices could head higher in the second half. Traditionally, the market’s major indexes begin to show improvement six months after the Federal Reserve begins lowering interest rates. The central bank made its first cut just after New Year’s.
History has even more to offer investors who need encouragement, said Moore of Dunvegan.
“It’s been a bull market since the Dark Ages,” he quipped.
Despite the continuing uncertainty, the market’s major indexes managed to end the week with healthy gains.
The Dow finished the week up 141.19, or 1.3 percent, at 10,951.24 on a 154.59 gain Friday. That was the Dow’s highest close since it reached 10,957.42 on Feb. 6.
The Nasdaq composite index rose 115.85, or 5.6 percent for the week. It closed Friday at 2,191.53 on a gain of 45.33.
The Standard & Poor’s 500 ended the week up 13.56, a 1.1 percent change, after rising 18.03 to 1,266.61 Friday.
The Russell 2000 index rose 7.24 Friday to 492.89, ending the week up 2.92 or 0.6 percent.
The Wilshire Associates Equity Index — which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues — ended the week at $11.687 trillion, up $178 billion from the previous week. A year ago, the index was $13.385 trillion.