MarketView for January 5

Summary

An ADP report indicating that three times as many private-sector jobs were created last month as had been previously expected turned Wall Street's early losses into gains on Wednesday, extending a rally in what some believe is already an over-bought market. Trading volume has picked up sharply after the two-week holiday period, showing participation in the latest stage of the rally although many indicators are pointing to a market that may be reaching the top of its recent trading range. The jump in private payrolls to nearly triple the forecast comes two days ahead of the government's labor report.

Private employers added 297,000 jobs in December, a report by the ADP Employer Services showed, which was nearly three times what economists forecast and the largest jump on record for ADP, which has data going back to 2000.

Employment agency Monster World rose 3.6 percent to $25.03. The stock is up more than 73 percent since the end of October after rising sharply ahead of the stronger-than-expected payrolls data for that month.

The S&P 500 ended 2010 up nearly 13 percent and recorded its best December since 1991, driven in part by encouraging economic data in the latter part of the year. Technical indicators, such as the S&P 500 relative strength index, which measures higher and lower closing prices over a given period, suggest the market could be at the upper end of its short-term trading range.

About 8.21 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, a number that was slightly below last year's average of 8.47 billion.

The encouraging data also lifted housing stocks. DR Horton was among the top gainers, up 3.2 percent to $12.40. Weakness in housing has been a major drag on the economy. The stronger data also helped put a floor under commodity prices that had weighed on the market earlier in the day. Industrial shares finished higher, with Caterpillar closing up 0.9 percent at $94.52.

Shares in the materials sector, however, remained weak, including Alcoa edging up 0.2 percent to $16.56.

In other economic data, the Institute for Supply Management reported the services sector grew in December at its fastest pace in more than four years. Yet, the employment component of the report fell, differing with the ADP report's trend and making some investors cautious.

Among stock losers, Family Dollar Stores fell 8.8 percent to close at $44.99 after the discount chain reported first-quarter earnings that missed expectations.

Jobs News Surprises

A surprise surge in private-sector employment last month to its highest level on record provided the most bullish signal in months that the U.S. economy is on the mend. Private employers added 297,000 jobs in December, up from a gain of 92,000 jobs in November, an ADP Employer Services report, whose data goes back to 2000, showed on Wednesday.

The report undercut the prices of the U.S. Treasury securities, and helped the U.S. dollar gain against the yen and the euro. U.S. stocks opened lower though they did pare losses after the jobs news. The ADP report, developed by Macroeconomic Advisers LLC, is often used by economists to fine-tune their forecasts for the payrolls numbers, though it is not always accurate in predicting the outcome.

Adding to the employment picture, the number of planned layoffs fell last month to the lowest level in 10 years, according to a report by consultants Challenger, Gray & Christmas Inc.

Tempering some of the optimism on Wednesday, an industry group said applications for U.S. home mortgages ebbed in the last couple of months of the year, with loan rates hovering around their highest levels in seven months.

The vast majority of the jobs increase, 270,000 jobs, was concentrated in the service-providing industries while the goods-providing industries contributed 27,000 jobs with manufacturing up by 23,000 jobs.

Macroeconomic Advisers Chairman Joel Prakken noted seasonal factors may have boosted the December numbers but said growth in employment was "comfortably into positive territory and seems to be accelerating."

December's gain in U.S. private payrolls reported by ADP Employer Services was the "most robust number" on record, with data going back to 2000, Macroeconomic Advisers LLC Chairman Joel Prakken said on Wednesday.

Prakken was speaking after the ADP report, jointly developed with Macroeconomic Advisers, showed private employers added 297,000 jobs in December. He noted seasonal factors may have boosted the December numbers but said: "It looks to me growth in employment has moved ... comfortably into positive territory and seems to be accelerating." Prakken said he's confident Friday's U.S. Labor Department nonfarm payrolls report will show a "healthy number."

Double-digit Market Gains Says BlackRock

Stocks could post double-digit returns in 2011 for the third straight year and outdo global markets, said Bob Doll, chief equity strategist at BlackRock. According to Doll’s comments, the S&P 500 index should rise to at least 1,350 by the end of 2011, implying a 7.4 percent move, calling that figure "a floor" for their target. He forecast improved growth, bolstered by falling unemployment and strong earnings for more gains in stocks.

Doll, a senior managing director at BlackRock who oversees more than $300 billion as part of BlackRock's $3.45 trillion in assets under management, said the U.S. will outperform the MSCI World Index, as it did in 2010.

The United States should benefit from more fiscal and monetary stimulus, a more innovative economy and better earnings growth prospects, all of which should help the stock market’s performance, Doll said.

The strength of the market should accelerate a developing shift once again to equity funds by retail investors and away from fixed income. "Equities are likely to take over from fixed income as the preferred asset class," he said.

Doll said the energy sector could be the top industry pick, followed by technology stocks, while financials were his least favorite sector. "My concern is where the revenue going to come from for financial sector companies,” he said. Doll said earnings should rise to an all-time high, surpassing the $91.47 per-share record for the S&P reached in 2007.

Credit problems remain a concern, and high commodities prices could pressure profit margins, he said. "What's the dark side look like? Credit is still an issue," particularly in the U.S. housing market, sovereign debt markets in Europe and U.S. state and local municipalities, he said. Commodity price increases and inflation fears also could derail a slow U.S. recovery, he said.

Among other predictions for 2011, Doll said that stocks will outperform bonds and cash; that the United States, Germany and Brazil will outperform Japan, Spain and China; and that the U.S. economy will create as many as 3 million jobs in 2011 as unemployment falls to 9 percent.