MarketView for December 4

Summary

The major equity indexes moved higher on Friday as a result of economic reports that indicated that the economy shed far fewer jobs than expected last month, brightening the outlook for profits going forward. Economically sensitive sectors such as industrials, technology, consumer and financials turned in the best showing. For example, 3M gained 1.4 percent to end at $78.24, leading the Dow higher. For the week, the Dow rose 0.8 percent, the S&P 500 gained 1.3 percent and the Nasdaq was up 2.6 percent.

Limiting the market's advance was the dollar's strength, which caused commodity prices and related stocks to fall, and helped fuel expectations that the Federal Reserve might have to the issue of raising interest rates. Even so, more stocks rose than fell.

There were 11,000 jobs lost in November, the smallest drop since the recession began in December 2007, and the unemployment rate also dipped, according to a Labor Department report. An improving labor market is considered crucial in fostering a recovery and in bolstering consumer confidence, which would help increase corporate profits. To foster a recovery, the Federal Reserve has kept its benchmark interest rates close to zero percent.

The Nasdaq received a positive boost from the likes of Intel Corp, which advanced after an upbeat forecast from TSMC, the world's biggest contract chip maker. Intel's stock rose 3 percent to $20.46.

Falling commodity prices weighed on natural resource companies. U.S. crude oil futures settled down 99 cents per barrel at $75.47. At the same time a dollar index, which measures the dollar against a basket of six other major currencies, rose 1.5 percent on the upbeat jobs data. Since the broader market hit a bottom in early March, stocks and the dollar have had a strong inverse correlation. When the dollar falls, stocks tend to rise and vice versa.

That correlation partly reflects the so-called carry trade, whereby investors borrow a currency offering relatively low borrowing costs in order to invest the proceeds in higher-yielding assets denominated in that low-yield currency. A stronger dollar caused investors to unwind some of their dollar carry-trade positions.

The government reported that the unemployment rate declined in November to 10.0 percent from October's rate of 10.2 percent, which was a 26 1/2-year high. Stocks also received some positive momentum from the day’s economic reports, such as the one indicating that factory inventories rose for the first time in over a year in October, while factory orders increased 0.6 percent.

Unemployment Numbers Raise Hope

A surprising drop in the unemployment rate and far fewer job losses last month raised hopes for a sustained economic recovery. The rate unexpectedly fell to 10 percent, from 10.2 percent in October, as employers cut the fewest number of jobs since the recession began. The government also said 159,000 fewer jobs were lost in September and October than first reported.

If part-time workers who want full time jobs and laid-off workers who have given up looking for jobs are included, the so-called underemployment rate also fell, to 17.2 percent from 17.5 percent in October.

The better-than-expected figures provided a rare bit of good news for a labor market that's lost 7.2 million jobs in two years. The unemployment rate hadn't fallen since July. Still, the respite may be temporary. Job creation is expected to remain far too weak in coming months to absorb the 15.4 million unemployed people who are seeking work — and the 11.5 million others who are underemployed. As more people begin seeking work, the jobless rate is likely to resume rising.

The report also offered evidence of how hard it remains to find a job: The number of people unemployed for at least six months rose last month to 5.9 million. And the average length of unemployment has risen to more than 28 weeks, the longest on records dating to 1948.

Even counting last month's decline, the unemployment rate has more than doubled since the recession began in December 2007, when it stood at 4.9 percent. And the underemployment rate has jumped to 17.2 percent from 8.7 percent.

According to the Labor Department report, the economy shed 11,000 jobs last month — a sharp improvement from October's revised total of 111,000. The average work week also rose to 33.2 hours, from a record low of 33 hours, along with average earnings. Economists expect employers will increase hours for their current workers before hiring new ones.

The increase in hours worked means employees are earning more income, which could help raise consumer spending and enable consumers to pay down more debt. Average weekly earnings increased by $4.08 to $622.17, the report said.

Temporary help services added 52,000 jobs, the fourth straight increase. That's also positive news, because companies are likely to hire temporary workers before adding permanent ones. Total employment usually starts to increase between three and six months after temporary employment.

The economy has now lost jobs for 23 straight months. But the small decline in November indicates the nation could begin generating jobs soon. Many economists think it will happen in the first quarter of next year.

The services sector gained 58,000 jobs last month, while manufacturing and construction shed 68,000 positions. Education and health services added 40,000 jobs, and government employment rose 7,000.

The unemployment rate fell because the number of jobless Americans dropped by 325,000 to 15.4 million. The jobless rate is calculated from a survey of households. The number of jobs lost or gained, by contrast, is calculated from a separate survey of business and government establishments. The two surveys can sometimes vary.

The unemployment rate also dropped because fewer people are looking for work. The size of the labor force, which includes the employed and those actively searching for jobs, has fallen by 1.2 million in the past six months. That indicates more of the unemployed are giving up on looking for work.

Democrats in Congress are considering legislation that would extend jobless benefits for those who have run out and help the unemployed pay for health care coverage. Those measures could cost up to $100 billion.

Factory Orders Rise

Factory inventories increased for the first time in more than a year in October, while factory orders also rose an unexpected 0.6 percent, the Commerce Department said on Friday, in signs the manufacturing sector is returning to health. September's rise in orders was also revised up to1.6 percent from the 0.9 percent originally reported.

Factory stocks increased 0.4 percent in October, after shrinking for 13 straight months, the department said. The inventories-to-shipment ratio, a measure of how long it would take to deplete current stocks, declined to 1.34 months' worth from 1.35 months' as shipments rose.

The growth in supply shows that factories are ramping up production as the U.S. economy begins growing again after its longest and deepest recession in decades.

Inventories, though, of durable goods dropped 0.1 percent, led by a decrease in machinery. It was the 10th month in a row that stocks of big ticket items dropped. Orders for durable goods also dropped, by 0.6 percent, in the second decrease in three months.