MarketView for January 4

The Standard & Poor's 500 index ended at a five-year high on Friday, lifted by reports showing employers kept up a steady pace of hiring workers and the vast services sector expanded at a brisk rate. The gains on the S&P 500 pushed the index to its highest close since December 2007 and its biggest weekly gain since December 2011.

Most of the gains came early in the holiday-shortened week, including the largest one-day rise for the index in more than a year on Wednesday after politicians struck a deal to avert the "fiscal cliff."

For the week, the S&P gained 4.6 percent, the Dow rose 3.8 percent and the Nasdaq jumped 4.8 percent to post their largest weekly percentage gains in more than a year.

The CBOE Volatility index fell for a fourth straight session, giving the index a weekly decline of nearly 40 percent, its largest weekly drop ever. The close of 13.83 on the VIX marks its lowest level since August.

In Friday's economic reports, the Labor Department said non-farm payrolls grew by 155,000 jobs last month, slightly below November's level. Gains were distributed broadly throughout the economy, from manufacturing and construction to healthcare.

Also serving to add some momentum to equities was data from the Institute for Supply Management indicating that the service sector activity expanding the most in 10 months.

With the S&P 500 index at a five-year closing high, analysts said any gains above the index's intraday high near 1,475 in September may be harder to come by.

The rise in payrolls shown by the jobs data did not make a dent in the unemployment rate still at 7.8 percent.

There is growing opinion that the Fed will in 2013 end its program referred to as QE3 during which it is buying up Treasury debt in an effort to stimulate the economy.

A drop in Apple of 2.6 percent to $528.36 kept pressure on the Nasdaq. Adding to concerns about Apple's ability to produce more innovative products, rival Samsung Electronics is expected to widen its lead over Apple in global smartphone sales this year with growth of 35 percent. Market researcher Strategy Analytics said Samsung had a broad product lineup.

Eli Lilly was among the biggest boost's to the S&P, up 3.7 percent to $51.56 after the pharmaceuticals maker said it expects its 2013 earnings to increase to $3.75 to $3.90 per share, excluding items, from $3.30 to $3.40 per share in 2012.

Johnson & Johnson rose 1.2 percent to $71.55 after Deutsche Bank upgraded the Dow component to a "Buy" from a "Hold" rating.

Shares of Mosaic gained 3.3 percent to $58.62. Excluding items, the fertilizer producer's quarterly earnings beat analysts' expectations, according to Thomson Reuters I/B/E/S.

Volume was modest with about 6.07 billion shares changing hands on the three major equity exchanges, a number that was slightly below the 2012 daily average of 6.42 billion shares.

Job Growth Continues, Albeit Slowly

Employers kept their pace of hiring steady in December, yet falling short of the levels needed to bring down the unemployment rate. However, other economic data on Friday provided a stronger signal with regard to the health of the economy as service sector activity expanded the most in 10 months.

Payrolls, excluding farm jobs, grew by 155,000 last month, the Labor Department said. That was a touch more than analysts' expectations and only slightly below the revised gain of 161,000 reported for November. Unfortunately, the jobless rate remained at 7.8 percent.

While firms kept on hiring despite the uncertainties raised by a budget stand-off in Washington, the report reinforced expectations of 2 percent economic growth this year. However, that growth rate is unlikely to bring down the unemployment rate any time soon. Furthermore, it is unlikely to make the Fed rethink its stimulus plan anytime soon despite growing unease among some policymakers over its bond-buying program.

The Labor Department revised its November unemployment estimate by a tenth of a point to 7.8 percent.

There is a rising consensus of opinion that the economy will be held back this year by tax hikes as well as by weak spending by households and businesses, which are still trying to reduce big debts taken on before the 2007-09 recession.

Friday's data nonetheless gave signals of some momentum in the labor market's recovery. Gains in employment were distributed broadly throughout the economy, from manufacturing to health care. The government also said 14,000 more jobs were created in October and November than originally estimated. Average hourly earnings rose 0.3 percent last month, slightly more than analysts had expected, while the length of the average workweek edged higher.

Separately, the Institute for Supply Management said its services index rose to 56.1 last month, the highest since February. Another report showed a gauge of business spending plans remained firm in November. The ISM report showed stronger levels of activity than expected, fanning speculation that a strengthening economy could lead the Fed to scale back its bond buying programs.

Nonetheless, hiring is still too weak for the Fed to consider taking its foot off the accelerator. The Fed has said it wants substantial improvement in the labor market before it eases up on its bond buying. 

On Thursday, minutes from the Fed's December policy review pointed to rising concerns over how the asset purchases will affect financial markets. St. Louis Federal Reserve Bank President James Bullard, thought to be less tolerant of inflation than many of his colleagues at the central bank, said on Friday the bond program could end this year if the economy improves.

Despite the signs of momentum in hiring, government spending cuts due to begin around March are looming over the economy. Also threatening the recovery, there is always the possibility, no matter how slight, the government could default on its debt if Congress doesn't give the government permission within a few months to increase borrowing.

White House economic adviser Alan Krueger told MSNBC the economy would do better if Congress promptly raised the debt ceiling. Yet, the government's $16.4 trillion debt limit has become a poker chip in congressional talks over how to push scheduled spending cuts further into the future.

A last-minute deal this week softened the tax hikes and postponed the cuts by two months, and hiring in December may have been slowed by uncertainty over the timing of the so-called "fiscal cliff."

Austerity already held back the economy in 2012. In December, government payrolls shrank by 13,000.