MarketView for March 29

 

 

Summary

 

After being down for most of the day, the Dow Jones Industrial Average managed to turn things around and chalk up a small gain for the day, while the S&P 500 and the Nasdaq came close but were unable to climb back up into positive territory. Among the companies making up the Dow, Coca-Cola rose 1.6 percent to end the dau at $73.81 after hitting a new 52-week high of $74.39.

 

Despite the S&P 500 adding another day of negative numbers, making it three in a row, the index is still up 2.8 percent for the month and nearly 12 percent for the year. It has gained almost 12 percent this quarter, its best start to the year since 1998 and its best quarter since the third period of 2009.

 

Jobless claims fell to a four-year low last week despite the previous week's figures being revised higher. However, the consensus seems to be that the Street is coming to the realization that improvement in the job market may be leveling off a bit.

 

Meanwhile, household income grew at a faster pace in the fourth quarter than previously thought, which could help underpin the possibility of increased spending this quarter.

 

JetBlue fell 4.2 percent to $5.00 on heavy volume after Lufthansa said it would offer a bond that was exchangeable into up to 4.67 million shares of JetBlue, a move seen as dilutive. Best Buy was down nearly 7 percent to $24.77 and was the S&P 500's largest decliner. The company reported weaker-than-expected sales, and said it will close 50 big-box stores and cut 400 jobs.

 

Red Hat closed up 19.5 percent to $61.43, its highest point since 2000 - after earnings exceeded expectations for the fifth straight quarter. During the trading day, the shares managed to move as high as $61.71.

 

Fossil ended the day up 0.8 percent to $133.67. Fossil will replace Medco Health Solutions in the S&P 500 as Express Scripts acquires Medco in a deal expected to be completed soon. The date of the index change has yet to be announced.

 

About 6.80 billion shares changed hands on the three major equity exchanges, close to the the daily average volume of 6.83 billion shares.

 

Jobless Hit Four Year Low

 

The Labor Department reported on Thursday that new claims for unemployment benefits fell to a new four-year low last week, indicating that the labor market is continuing to improve. Initial claims for state unemployment benefits fell by 5,000 claims to a seasonally adjusted 359,000 claims, the lowest level since April 2008.

 

The report included revisions for claims data from 2007 based on updated seasonal adjustment calculations. New seasonal adjustment factors were also introduced for 2012. The prior week's figure was revised upward to 364,000 claims from the previously reported 348,000 claims. The four-week moving average for new claims, a measure of labor market trends, fell by 3,500 claims to a total of 365,000 claims.

 

A Labor Department official said there was nothing unusual in the state-level data and only two states - Alaska and Hawaii - had been estimated.

 

The unfortunate part of the labor picture is that the number of people still receiving benefits under regular state programs, after an initial week of aid, fell 41,000 to 3.34 million in the week ended March 17, the lowest since August 2008. A total of 7.153 million people were claiming unemployment benefits during the week ended March 10 under all programs, down 131,488 from the prior week.

 

Businesses have been restocking their shelves at a slower pace and shipping fewer long-lasting manufactured goods. In addition, Europe's debt crisis and slower growth in Asia have reduced demand for U.S. exports. Stronger hiring in the first two months of the year probably hasn't offset those weaknesses. That's because Americans' pay has barely kept pace with inflation while gas prices have spiked. So consumer spending, which accounts for 70 percent of economic activity, probably hasn't increased much from the end of last year.

 

There is a good chance that growth will pick up later this year, as more hiring lifts the economy. Keep in mind that from December through February, employers added an average of 245,000 jobs per month. That has pushed down the unemployment rate to 8.3 percent, the lowest in three years. Companies are hiring more workers because the economy is picking up. The economy grew at an annual rate of 3 percent in the final three months of last year. That was better than the 1.8 percent rate in the previous quarter.

 

One concern is that rising gas prices will force consumers to cut back on discretionary spending. That could weigh on economic growth and slow hiring. The Federal Reserve says it expects oil and gas prices to temporarily boost inflation but predicts that longer-term inflation should remain stable.

 

The job market still has a ways to go to fully recover from the Great Recession, although the more robust job market has caused some so-called "discouraged workers" to start looking again. The work force rose by nearly a half-million in February.

 

Final GDP Number Unchanged

 

The economy expanded as expected in the fourth quarter while personal income grew at a much faster pace than previously thought, which should help underpin spending this quarter.

 

Gross domestic product increased at a 3.0 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said in its final estimate on Thursday, unrevised from last month's estimate. The economy grew at a 1.8 percent rate in the third quarter.

 

However, personal income was $13.162 trillion at a seasonally adjusted annual rate, $3.3 billion more than previously reported. Disposable income was $10.6 billion more than previously thought, likely reflecting the strengthening labor market.

 

Gross domestic income, which measures output from the income side, increased at a 4.4 percent rate, the fastest since the first quarter of 2010 - from a 2.6 percent rise in the third quarter.

 

Household Income Higher

 

The Commerce Department reported that household income grew at a faster pace in the fourth quarter than previously thought as the jobs market strengthened, a development that could underpin the consumer spending that is the economy's main pillar. The Department said on Thursday that real disposable income rose to a seasonally adjusted annual rate of $11.73 trillion, $10.6 billion more than previously estimated.

 

While its final estimate left growth in gross domestic product at an unrevised 3.0 percent pace last quarter, when measured from the income side, the economy expanded at a solid 4.4 percent rate - the quickest since the first quarter of 2010.

 

"That may indicate that there is a little more strength out there in the economy than what the GDP numbers would indicate," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.

 

Economists said the strong rise in gross domestic income, which followed a 2.6 percent advance in the third quarter, reflected stepped-up hiring.

 

The firming labor market tone was underscored by a separate report from the Labor Department showing the number of Americans filing new claims for unemployment benefits eased to 359,000 last week, the lowest level in nearly four years.

 

Initial claims have trended lower for much of March, raising hopes of a fourth straight month of nonfarm payrolls gains above 200,000. The government will release its closely followed employment report on April 6.

 

"The labor market and job creation appears to have strengthened significantly in the first quarter of the year," said John Ryding, chief economist at RDQ Economics in New York.

 

Economists said the strengthening in income growth better explained the quickened pace of hiring seen in recent months than the more tepid increase in GDP, which they said could be understating the economy's vigor.

 

With companies hiring more workers, profit growth slowed to a 0.9 percent rate in the fourth quarter, the smallest increase in three years, from 1.7 percent the prior quarter.

 

Four Psychological Mistakes

 

It's been said of life that we are our own worst enemies, for the mindless decisions we make, as well as our frequent inability to learn from them. Nowhere is this more evident than on Wall Street, where this enemy from within has a way of making us too confident, too timid, too impulsive, and too staid - sometimes even all at once. Consider for example the following:

 

Anchored in the Past

 

Oh how easy it is to pick winners with the benefit of hindsight. And yet, one of the biggest blunders investors make is the tendency to make decisions in the rear-view mirror instead of the through the windshield.

 

"There's always some big recent event that everyone anchors themselves on," says Russell Pearlman, sr. markets editor at SmartMoney magazine. "These days everyone is anchored on all the bad stuff that happened in 2008."

 

Even though that particular fear or any other fear may be valid, Pearlman says it has caused countless investors to either sit on the sidelines or seek the theoretical safety of Treasuries.

 

While not advising investors to become cavalier about risk, Pearlman is pointing out the pitfalls of paralysis, saying "what happened in 2008 should not be the be-all, end-all rationale for making an investment or not making an investment."

 

Confirmation Bias

 

This trait can be observed both on and off Wall Street and is perhaps the most pervasive mistake we make. As Pearlman says, "this is a behavior that all of us exhibit." So what exactly is confirmation bias?

 

"This is seeking out information that confirms what you already know or want to believe," Pearlman says. Apple is a good example, given its meteoric rise and fervently loyal fan base. A mere mention of something critical about giant is almost certain to trigger an avalanche of counter-attack, rather than evoke a thoughtful debate. This mindset is dangerous and will ultimately hurt you.

 

The Thrill of the New

 

Perhaps it is our ever shrinking attention spans or simply the result of a growing stable of incredibly cool gadgets, but Pearlman sees danger in our infatuation with new stuff. "Everyone loves new things," he says, "but that can work against you too."

 

For example, McDonalds, an unbelievably successful company and stock, happens to also be in the staid business of making hamburgers. The advice here is to be open to all ideas, not just ones tied to new things.

 

Overvaluing Experts

 

At a time when more information from more places moves faster than ever, Pearlman says it is imperative that investors take some ownership in the decision-making process. "We assume experts know everything," he says, "often in fields that they're not expert in." This is in no way a slight to all authority or legitimate expertise, but rather a cautionary caveat to stay involved.