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Stock market on a roll despite slowing economic growth, lingering unemployment

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The U.S. stock market is closing out April at its highest level in years, even as economic growth has slowed in recent months and joblessness remains high.

Record corporate profits have helped power the Dow Jones industrial average up more than 10 percent for 2011, to its highest point in nearly three years. The Standard & Poor’s 500-stock index has increased more than 8 percent. The tech-heavy Nasdaq has reached a level not seen since December 2000.

“Why is the stock market performing so well despite the economy performing below average? Earnings growth is on a tear,” said Ed Easterling, president of the investment management and research firm Crestmont Research in Oregon.

One explanation is that the boom and bust cycles of corporate earnings do not always track with the performance of the broader economy. In the past six decades, the U.S. economy grew nearly every year, but in one-third of those years, corporate earnings declined.

Another factor is that as U.S. multinationals rely more on generating business overseas, their hiring has slowed domestically — meaning corporate profits and higher share prices do not necessarily translate to more jobs and higher wages in this country. Recent data from the Commerce Department show multinational firms have reduced their employees in this country by 2.9 million in the past decade. At the same time, they have hired 2.4 million more employees overseas.

With corporate America in the middle of reporting quarterly earnings, many firms — especially in the industrial and tech sectors — have seen their stocks surge as their numbers surpass Wall Street’s expectations.

On Friday, Caterpillar said worldwide sales of its construction machinery rose 61 percent in the first quarter compared with a year ago. Its stock jumped 2.3 percent on the news.

Earlier this month, tech firms including Intel and Apple saw their stocks surge after reporting impressive earnings.

But recent economic news has been mixed, casting doubt on just how quickly the U.S. economy is recovering.

The dollar declined steeply over the course of April, its 3.7 percent drop against six other major currencies the steepest monthly decline since September. The declining value of the dollar reflects soft U.S. economic growth and expectations that the Federal Reserve will keep interest rates low for a long time, which makes the dollar a less attractive currency than those in countries where central banks are raising rates. For example, the European Central Bank raised its target interest rate in early April to combat inflation.

Meanwhile, American consumers spent 0.6 percent more money in March, according to data released Friday by the Commerce Department, though much of that was due to higher gas and food prices. Adjusted for inflation, spending increased 0.2 percent.

On Thursday, government data showed that the economic recovery slowed its pace during the first quarter of 2011, with the economy growing at a rate of 1.8 percent, compared with 3.1 percent in the last three months of 2010.

Initial jobless claims also jumped to 429,000 for the week ending April 23, according to the Labor Department.

Still, investment managers say people are entering the stock market to take advantage of the rising tide in stock prices.

Retail investors “are finally hopping on the bandwagon, hoping not to miss the train,” said Fred Dickson, chief investment strategist at D.A. Davidson & Co., adding that many are growing frustrated holding their money in cash, because interest rates are so low.

Dickson said stocks remained strong this week despite the weaker economic growth figures because Fed Chairman Ben S. Bernanke said Wednesday that the central bank would, as Dickson put it, keep “the monetary fire hose on.”

Bernanke said the Fed was sticking to its attempt to stimulate the economy by purchasing $600 billion of U.S. Treasury bonds.

Easterling pointed out that the stock market, contrary to what people might expect, does not track historically with economic growth. He noted that in the 1970s, the Dow rose only 0.5 percent while the gross domestic product jumped 10 percent, not adjusted for inflation. During the 1990s, he said, stocks increased more than 15 percent while the economy grew 5.5 percent.

Also, he pointed out that inflation has for decades been a significant factor in stock performance. During the 1960s and 1970s, with generally rising inflation, there was hardly any growth in the stock market. In more recent decades, when inflation was kept under control, returns were much higher.

Easterling said that, this week, anyone looking for signs of lower inflation would have been reassured to see Bernanke restate the Fed’s commitment to keeping inflation low.

Staff writer Neil Irwin contributed to this report.

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