Stock rally ignited by employment report has legs

NEW YORK -- Stocks rallied Friday as investors focused on the positives from the Labor Department's July employment report.

The Dow Jones industrial average rose almost 2%, the broader Standard & Poor's 500 index gained 2.1% and the tech-heavy Nasdaq composite index rocketed 2.2%.

The economy added a better-than-expected 163,000 jobs in July. Analysts had expected 100,000 more jobs last month, according to a FactSet survey.

"It's undeniable that the report came out better than expected and certainly better than feared," says Jim Paulsen of Wells Capital Management. "That's the real catalyst."

Job growth wasn't enough to reduce the unemployment rate, which ticked up to 8.3% from 8.2%. The unemployment rate is calculated from a household survey, while the payroll number comes from a survey of employers.

Alan Levenson of T. Rowe Price wrote in a report that the economy looks to be on track to increase jobs by 150,000 a month. At that clip, though, the unemployment rate may decline by only half a percentage point a year, he says.

The job news is strong enough that the Fed may not need to resort to additional stimulus at its September meeting, according to Levenson.

And if the Fed doesn't move, investors will be pleased that the economy can dig itself out of its soft patch without the Fed's help, Paulsen says. "It would be the first time" in years, that the economy could "walk on its own."

Progress in Europe combined with better-than-expected news on the U.S. jobs front is what investors need to get back into stocks, Paulsen says. The flurry of recent economy reports is showing that the U.S. economic slowdown that started in June may be easing, he says, and there "may be a change in momentum."

Some investors disagree. While the number of jobs was better than expected, "the guts of the report were soft," Michelle Meyer of Bank of America Merrill Lynch said in a report to clients. Numbers were weak enough to show the Fed may have to take additional steps to jump start the economy, she says, however, the report was good enough that it "may have bought the Fed some time."

The jobs report fanned improving investor sentiment following events in Europe, which continues to be challenged by a debt crisis and slowing growth. European stocks rallied stongly Friday, with Britain's FTSE 100 up 2.2%, while Germany's DAX added 3.8%. France's CAC 40 climbed 3.8%.

Investors are betting that the European Central Bank will launch a plan to buy bonds to stimulate the economy. The idea of stimulating the economy had been unpopular with Germany, since it was viewed as a way to benefit just the weaker countries, like Greece, Paulsen says. But now that Germany's economy is beginning to sputter, moves to stimulate the Eurozone will benefit Germany as well. "The Greek problem is now the German problem," he says.

Increasing, investors are gaining more confident that ECB President Mario Draghi will take the steps necessary to fix the European situation, says Peter Cardillo of Rockwell Global Capital. "He reiterated that the Euro is here to stay," Cardillo says.

After rising most of the previous week, stock markets fell sharply Thursday and borrowing rates for Spain and Italy jumped, suggesting investors are more concerned they will need financial aid.

On Friday, the euro was 0.5% higher at $1.2243, but bond markets failed to recover much. While Italy's 10-year bond yield edged down after Thursday's surge, Spain's inched higher. It was at 7.07%, a level considered unsustainable in the long term.

Earlier Friday, Asian indexes closed lower, as traders there followed Thursday's markets down. Japan's Nikkei 225 stock average finished down 1.1% at 8,555.11, and Hong Kong's Hang Seng was 0.2% lower to 19,652.50. Australia's S&P/ASX 200 shed 1.1% to 4,221.50, and South Korea's Kospi dropped 1.1% to 1,848.68. The Shanghai Composite rose 1% to 2,132.80.

In energy trading, benchmark crude was up a strong $3.56 at $90.69 a barrel in electronic trading on the New York Mercantile Exchange on the jobs report. The contract fell $1.78 to close at $87.13 on Thursday in New York.

Contributing: Associated Press