MarketView for February 3

 

 

Summary 

 

A sharp rise in hiring last month drove the Nasdaq to an 11-year high on Friday as optimism grew that the labor market is on a steady path to recovery. The broad-based gains on solid trading volume also sent the Dow Jones industrial average near a four-year high. The S&P 500 extended its 2012 advance to about 7 percent and was at its highest level in more than six months.

 

Our economy created jobs at the fastest pace in nine months during January and the unemployment rate dropped to nearly a three-year low of 8.3 percent, the government said. Although the news is positive, it will take a number of succeeding months of substantial job gains to maintain momentum in a market that has risen more than 25 percent since October lows.

 

More than 450 stocks across all sectors hit 52-week highs, including Apple (AAPL.O), United Parcel Service (UPS.N), Yum Brands (YUM.N) and MasterCard (MA.N). The number of NYSE stocks making new 52-week highs was at it highest since July.

 

In another report signaling strength, the pace of growth in the services sector unexpectedly accelerated in January to its highest level in nearly a year.

 

Signs of an improving economy and an absence of bad news from Europe have helped Wall Street stocks rally since last year. However, keep in mind that the market is still susceptible to risks such as a flare-up in Europe's debt crisis or geo-political uncertainty in the Middle East that could generate an oil price shock.

 

For the week the S&P ended up 2.2 percent for its fifth week of gains in a row. The Dow Jones Industrial average was up 1.6 percent and the Nasdaq chalked up a gain for the fifth straight week, this week amounting to 3.2 percent making it the best week since early December.

                 

Nonfarm payrolls rose by 243,000 new jobs, the Labor Department said, as factory jobs grew by the most in a year. The jobless rate fell to 8.3 percent, making it the lowest point for that statistic - since February 2009, from 8.5 percent in December.

 

Approximately 8.03 billion shares changed hands on the three major exchanges on Friday That number exceeds the 200-day moving average of about 7.75 billion shares.  More than half way through the earnings season, 60 percent of S&P 500 companies that have reported have exceeded expectations according to Thomson Reuters I/B/E/S data.

 

Gilead Sciences was one of the top gainers on the S&P 500, up 10.9 percent to $54.69 a day after announcing promising early results from a trial of a hepatitis C drug. It also posted adjusted fourth-quarter profit below consensus.

 

Job Growth Up and Unemployment Down

 

The economy created jobs at the fastest pace in nine months in January and the unemployment rate dropped to a near three-year low of 8.3 percent, providing some measure of comfort for President Barack Obama who faces re-election in November.

 

Nonfarm payrolls jumped 243,000, the Labor Department said on Friday, as factory jobs grew by the most in a year. The gain in overall employment was the largest since April and outpaced economists' expectations for a rise of only 150,000. The report pointed to underlying strength in the economy, despite expectations that growth will slow in the first quarter.

 

Economists had expected the jobless rate to hold steady at 8.5 percent. The rate is the lowest since February 2009 and has dropped 0.8 percentage point since August. The decline last month reflected large gains in employment in the separate household survey from which the unemployment rate is derived. The continued labor market improvement could be a relief for Obama who faces a tough re-election.

 

The report contrasted with a glummer assessment of the economy's prospects offered by the Federal Reserve last week and it could lessen chances of the central bank launching another round of asset purchases to spur a stronger recovery. Chairman Ben Bernanke said the Fed was mulling further purchases to speed up the recovery. It has already bought $2.3 trillion in bonds to keep rates low and spur the economy. The Fed said it would probably hold interest rates near zero at least through 2014, citing still-high unemployment.

 

Job gains last month were widespread, with even the transportation and warehousing sector increasing payrolls. The tenor of the report was further strengthened by revisions to November and December payrolls data, which showed 60,000 more jobs created than previously reported.

 

In addition, average hourly earnings rose four cents, which should help to support spending. The report suggested that expectations of a slowdown in U.S. economic growth in the first quarter were not yet impacting on companies' hiring decisions.

 

Employment in the private sector surged 257,000 - the largest gain since April. Government payrolls fell 14,000, the least amount since September.

 

While job growth has quickened there are no jobs for three out of every four unemployed people and 19.3 million Americans are either out of work or underemployed. But there is reason for cautious optimism. The unemployment rate has declined for five straight months, partly because of unemployed workers giving up the hunt for a job but also because people are finding work.

 

A broader measure of unemployment, one which includes people who want to work but have stopped looking and those working only part time but who want more work, was down but only  to 15.1 percent in January from 15.2 percent in December.

 

The January household survey data incorporated new population controls. The department also released annual revisions to the payrolls data from the survey of employers and introduced new factors to adjust for seasonal fluctuations. It said the level of employment in March of last year was 165,000 higher than it had reported, on a seasonally adjusted basis.

 

Mild winter weather boosted construction employment last month, which added 21,000 after a 31,000 increase in December. Manufacturing surged 50,000, the largest rise in a year, after rising 32,000 the prior month. That contributed to the goods-producing sector posting 81,000 jobs last month, the most since January 2006.

 

Transportation and warehousing employment increased 13,100 and courier jobs only fell 1,500. Last month, the Labor Department reported a large increase in courier jobs in December, but revisions showed they actually declined.

 

Retail employment rose 10,500 after gaining 6,200 in December. Temporary help services jumped 20,100 after rising 8,300.

 

Stock Selection Capabilities Matter Once Again

 

After a year in which stocks moved in near-lockstep regardless of individual merit, the herd mentality is crumbling away. The move away from a frenzied rush in and then back out of the market is a welcome sign.

 

The change reaffirms the diversification strategies that underpin trillions of dollars’ worth of savings meant for college tuition and retirement. When just about everything is moving in the same direction, investors have fewer ways to cushion market down turns.

 

In 2011, daily activity in individual stocks was less dependent on company reports than on action in European government debt markets, and the equity, currency and commodities markets traded in tandem. Now that stocks are going their own way, it's been good for so-called active fund managers, those who decide what individual stocks are best to hold rather than follow an index.

 

In January, about 70 percent of active managers outperformed the S&P 500, compared with just 23 percent in 2011, according to Bank of America/Merrill Lynch data.

 

Correlations, a measure of how tight a relationship individual securities or entire markets have with each other, have fallen sharply since the volatile trading days of last summer. The rolling 10-day correlation of S&P 500 stocks had reached 80 percent in the fourth quarter of 2011, and fell to around 10 percent in early January, according to the bank.

 

Meanwhile, individual investors aren't yet convinced. Despite a 4.3 percent increase in the S&P 500 in January - the second-best month since the end of 2010 - trading volume is down 15 percent from a year ago.

 

Volatile, correlated trading amplifies the post-flash crash suspicions of many retail investors who see markets as the playthings of big money with the resources to hire legions of PhDs and use expensive technology to keep up with high-speed trading.

 

Since the financial crisis began to get a grip at the start of 2008, investors have pulled more than $400 billion from U.S. equity funds, and the figure keeps growing, with $7 billion withdrawn so far this year, according to the Investment Company Institute.

 

Nonetheless, concerns have abated, and so called “stock jockeys” are in a position to thrive if Europe's debt talks proceed and our economic figures continue to improve.

 

Some naysayers continue to caution that the return to profitable stock-picking could be short-lived. Fund managers looking to distinguish themselves from others now have to contend with this quarter's earnings trends, which show a lot of companies suffering declining revenue and a reduced number of companies beating earnings forecasts.

 

Derivatives strategists at JPMorgan Chase note that implied correlation - expectations for how tight the relationships between stocks will be in coming months - has only declined modestly.

 

That suggests investors are still hedging against a flare-up of troubles, likely from Europe.

 

Factory Orders Rise

 

According to the a report released by the Commerce Department on Friday, new factory orders posted a second straight monthly rise in December and business capital spending also picked up. The Department indicated that orders for manufactured goods increased 1.1 percent.

 

In addition, November's gain was revised up to 2.2 percent from a previously reported 1.8 percent and there were signs in the report of a firmer pace of overall factory activity. During the full year 2011, factory orders gained 12.1 percent after a 12.9 percent rise in 2010.

 

Orders for non-defense capital goods excluding aircraft - a closely watched category because it is taken as a sign of businesses' future spending plans - climbed a solid 3.1 percent in December. That followed declines of 1.5 percent in November and 0.9 percent in October. Shipments of non-defense capital goods also increased by 3.1 percent during December,  a number that matched the 0.9 percent decreases in each of the two previous months.

 

Business spending had been a driver of the recovery since the 2007-2009 financial crisis, which pushed our domestic economy into a deep recession.

 

During December, there were widespread gains in key order categories from computers to fabricated metal products and transportation equipment. Orders for electrical equipment were down from November, one of the few categories that declined.