MarketView for February 4

Summary 

The S&P 500 posted one of its best weeks that we have seen in the past two months on Friday as the market defied calls for a pullback, and the Street moved into defensive and lagging sectors, a direction that could see further advances during the coming weeks. However, while signs of an improving economy and strong corporate earnings have sent share prices higher, the declining volume is an indication that investors are moving to the sidelines.

Volume on the major exchanges was 7.29 billion shares, well below last year's estimated daily average of 8.47 billion. Nonetheless, both the Dow Jones industrial average and the S&P 500 indexes hit new 2 1/2-year highs.

January's employment data had a limited impact as job creation was weak but the unemployment rate fell, leaving the report subject to a variety of interpretations. Sectors that have posted strong gains recently, such as energy, materials and industrials, showed signs of profit-taking as investors moved into consumer discretionary and technology shares. Employment rose by a meager 36,000 jobs in January, far less than expected. At the same time, the unemployment rate fell to 9.0 percent, its lowest level since April 2009.

For the week the Dow Jones industrial average was up 2.3 percent, the S&P 500 chalked up a gain of 2.7 percent and the Nasdaq was up 3.1 percent. The strength in technology helped push the Nasdaq to new 3-year highs after the index posted its best week since mid-September, but the move was not broad-based as declining stocks came in just ahead of advancers.

A jump in Treasury debt yields could favor companies with stronger balance sheets as investors start to worry about funding costs. The yield on the 10-year note rose to 3.64 percent, the highest it has been since May 2010.

Shares of JDS Uniphase and other optical component makers jumped a day after the company posted solid quarterly results, helped by ever-increasing demand for higher bandwidth in smart phones, tablets and other applications. JDS saw its share price end the day up 26.9 percent to close at $22.76..

Aetna provided 2011 earnings guidance that was well above of Wall Street's target on Friday and increased its dividend, sending its shares 12.5 percent higher to close at $37.42. Tyson Foods rose 5.7 percent to close at $18.56 after the company said quarterly earnings were up 86 percent.

Unemployment Rate Falls Sharply

Employment rose by a meager 36,000 jobs in January, far less than expected, as severe snow storms slammed large parts of the nation, but the unemployment rate fell to its lowest level since April 2009.

Despite the conflicting signals in the Labor Department's report on Friday, the job market recovery is gaining speed. The payrolls gain was a quarter of the 145,000 gain that had been expected. Yet, a separate household survey, which is used to determine the jobless rate, showed nearly 600,000 more people reported they were employed. That increase pushed the unemployment rate down to 9 percent from 9.4 percent in December. It has dropped 0.8 percentage point since November, the biggest two-month decline since 1958.

Still, the decline in the jobless rate is unlikely to discourage the Federal Reserve from completing its $600 billion government bond-buying program to support the economy. Fed Chairman Ben Bernanke on Thursday sounded a more upbeat note on the economy, but said "it will be several years before the unemployment rate has returned to a more normal level."

The blizzards, which pounded the Northeast in January and buried cities in knee-deep snow, reduced payrolls by between 50,000 and 100,000. At the same time, signs of underlying strength in the labor market were obvious when you consider that the November and December payrolls, indicated that 40,000 more jobs created than previously estimated.

Although the Labor Department's payroll count continues to show moderate growth, independent surveys have suggested a pick-up in the pace of job creation, raising concerns that the government might be missing growth coming from new businesses. Labor Department chief economist Betsey Stevenson told reporters the count was likely falling short, just as faulty estimates of how many companies were created or destroyed led to an understatement of job losses during the recession.

"It's a challenge for the establishment survey to be able to accurately record the number of businesses that are starting up and the number of businesses that are shutting their doors," Stevenson said. "Now that we are in a recovery it's most likely, but we won't know for sure until next year, that we are missing a lot of businesses that are opening their doors and that we're over estimating the number of business that might be shutting their doors."

The head of the White House Council of Economic Advisers, Austan Goolsbee, was quoted as saying that the employment report showed "continued progress but it's not fast enough." According to the Labor Department, the household survey found that 886,000 Americans had been kept home by the heavy snowstorms, roughly double the number who are snow-bound in a typical January. Nonetheless, the separate survey of establishments counts someone as employed even if they worked only one hour during the survey period.

The data, excluding the weather effect, was consistent with economic growth above 3 percent. What is important is whether the decline in the jobless rate is sustained. Last month's drop was encouraging because it reflected more people finding work. In recent months, a large portion of the decline in the jobless rate had reflected people giving up the search for work, meaning they were no longer counted among the ranks of the unemployed.

A broad measure of unemployment that includes workers who want a job but have stopped looking and those working part time for economic reasons dropped to its lowest level since April 2009. The number of long-term unemployed also fell.

Last month, the private services sector added only 32,000 jobs after increasing 146,000 in December. Payroll increases in goods-producing sectors rose 18,000, with manufacturing recording its largest gain since August 1998. Severe weather hit construction payrolls, which dropped 32,000 last month. There were also large declines in the employment of couriers and messengers. Government payrolls fell for the third straight month, pulled down by state and local governments.