Record-breaking day on Wall Street

NEW YORK (CNNMoney.com) -- Stocks rallied Friday after a strong September jobs report raised bets that the economy will be able to avoid a recession, despite the drag from the housing and mortgage market meltdown.

Bond prices slumped, boosting the corresponding yields on bets that if the economy is holding up better than thought, the Fed won't necessarily need to keep cutting interest rates.

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The Dow Jones industrial average (Charts) gained almost 0.7 percent, briefly hitting a record trading high of 14,123.72 during the session before retreating.

The broader S&P 500 (Charts) index added almost 1 percent and closed at a new all-time high. During the session, the S&P 500 briefly hit a new all-time intraday high of 1561.91 before scaling back a bit.

The tech-heavy Nasdaq composite (Charts) gained around 1.7 percent, closing at a fresh 2007 record and its highest point since Feb. 2001.

The third-quarter earnings reporting period unofficially kicks off next week with a pair of Dow components - Alcoa on Tuesday and General Electric on Friday.

Employers added 110,000 jobs to their payrolls in August, just topping forecasts for a rise of 100,000. In addition, the August number was revised to a gain of 89,000 jobs from the originally reported loss of 4,000 jobs.

Despite the gain in payrolls, the unemployment rate, which is generated by a separate survey, rose to 4.7 percent in the month from 4.6 percent in the previous month. The gain was as expected.

The report seemed to hit that middle ground that stock investors crave, suggesting the economy is holding up, but not accelerating too quickly.

"Stand alone, this was a good employment report," said Gregory Miller, chief economist at SunTrust Banks. "In context, it probably doesn't change the underlying theme that this economy and this labor market have been stair-stepping downwards."

Overall it suggested that the economy hasn't fallen apart, but is also not reaccelerating too rapidly, Miller said.

Recent weak reports on manufacturing and durable goods orders had raised bets that problems in the housing sector were spreading to the broader economy.

While that still may prove to be true, the jobs report at least tempered worries about the extent of the pullback in the labor market.

Nonetheless, the heady days of the economy creating an average of 200,000 jobs a month have clearly passed, and some analysts are concerned that the full brunt of the housing market slowdown has yet to be felt in the jobs market.

"As good as the jobs report was, I don't think it changes the longer term problems with employment," said Ben Halliburton, chief investment officer at Tradition Capital Management.

Halliburton said that significant layoffs are still on the horizon related to the housing market and that this could hit the consumer. The consumer is already feeling the impact of a slower-growing economy, according to the latest holiday shopping outlook. (Full story).

Amid such concerns, next week's September retail sales report and reading on producer prices will be closely watched.

In terms of what it might mean for interest-rate policy, the report would seem to diminish the likelihood of the Federal Reserve cutting interest rates at its meeting at the end of the month, Miller said.

The report's inflation component seemed to support the Fed holding off. Average hourly earnings rose 0.4 percent after rising 0.3 percent in August. Economists thought wages would rise 0.3 percent.

Treasury prices slumped, boosting the corresponding yields on bets that the Fed won't cut rates at the end of the month. The selloff lifted the yield on the 10-year note to 4.63 percent from 4.51 percent late Thursday.

However, the possibility that the Fed won't cut again at the end of the month didn't seem to rattle stock investors as it might have a few weeks ago.

"For the stock market, sometimes it reads Fed easing as good news, sometimes not," Miller said. "I think for today, stock investors are reading the potential for no more Fed easing as positive because it means that conditions are not so bad that the Fed will need to ease."

Fed Vice Chairman Donald Kohn, speaking to the Philadelphia Chamber of Commerce Friday, said that while financial market conditions have improved since the Fed cut interest rates on Sept. 18, liquidity in the credit markets is not back to normal.

He also said that the Fed's policy action won't stem the problems in the economy for several quarters, with the housing market in particular likely to continue to lag for some time

In corporate news, Merrill Lynch joined the recent parade of financial companies warning about the earnings impact from the fallout in the housing and credit markets. Merrill said it will post a third-quarter net loss of about 50 cents per share and will write down about $5.5 billion.

Nonetheless, Merrill (Charts, Fortune 500) shares rose, with investors continuing to reward financial companies for not disappointing them even more with their earnings reports, relative to grim expectations. In addition, a sense that the worst is over for the sector has helped the stocks recently after a tough third quarter.

Bears Stearns (Charts, Fortune 500) is reportedly the focus of a criminal probe related to the collapse of two of its mortgage-related hedge funds. Yet, after sliding in the morning, Bear stock rebounded and closed higher.

Late Thursday, Research in Motion (Charts) reported higher quarterly earnings and revenue that beat expectations. The Blackberry maker also boosted its current-quarter profit forecast. Shares jumped nearly 13 percent Friday.

Also after the close Thursday, Alcoa (Charts, Fortune 500) said it will sell two of its divisions and that it will restructure another one. Shares of the Dow component rose 3 percent Friday.

Among other Dow gainers, GM (Charts, Fortune 500), American Express (Charts, Fortune 500) and Caterpillar (Charts, Fortune 500) all gained at least 2 percent.

Among other movers, Yahoo (Charts, Fortune 500) shares gained after an analyst report said that breaking up the company could boost its share value.

Apple (Charts, Fortune 500), Oracle (Charts, Fortune 500), RF Micro Devices (Charts) and Applied Materials (Charts, Fortune 500) were among the other big technology shares leading the charge.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than 3 to 1 on volume of 1.26 billion shares. On the Nasdaq, advancers topped decliners by almost 3 to 1 on volume of 2.02 billion shares.

In currency trading, the dollar slipped versus the euro and gained versus the yen.

U.S. light crude for November delivery fell 22 cents to settle at $81.22 a barrel on the New York Mercantile Exchange.

COMEX gold for December delivery rose $3.40 to $747.20 an ounce.