MarketView for March 6

Summary

For the most part it was another good day on Wall Street with the Dow Jones Industrial Average breaking through to another new high, in part due to a private payroll survey that bodes well for the monthly jobs report due out on Friday.

Improved labor market data from the private sector sparked the positive tone and boosted confidence for the government's payroll report on Friday. The data from payrolls processor ADP followed similarly strong reads on housing and the services sector, reports that have contributed to lifting the Dow to historic levels and pushing up the S&P 500 to just 1.5 percent below its own record close.

Continued support from the Federal Reserve and equity valuations that are considered attractive compared with other asset classes have also pushed shares higher, and while some continue to call for a pullback at recent levels, those factors staying in place could keep the positive momentum intact.

Energy and material shares led the advance. Both sectors are closely tied to growth expectations. Peabody Energy rose 3.5 percent to $21.53, while Chevron gained 0.5 percent to $118.47. Newmont Mining rose 3.7 percent to $40.01 while U.S. Steel added 3.9 percent to $20.76. Freeport-McMoRan Copper & Gold was the S&P 500's top percentage gainer, up 4.1 percent at $32.84.

The S&P 500 index is trading at 13.6 times estimated 12-month earnings, compared with around 14.9 times in October 2007 when the index hit its intraday high, according to Thomson Reuters data. This suggests that stocks are still about 9 percent cheaper than they were at the 2007 peak.

Relative to junk bonds, the earnings yield on the S&P 500 - the inverse of the P/E ratio and used for valuation comparisons with bonds - is around 7.5 percent - above the yield to maturity on junk bonds, which is around 6.5 percent, data showed, indicating that stocks have a better value than the riskiest corporate bonds.

Shortly after Wednesday's trading began, the Dow moved through the previous session's intraday record, trading as high as 14,320.65. On Tuesday, the Dow ended at 14,253.77, exceeding October 2007's record close of 14,164.53. For the year, the Dow is up 9.1 percent.

Tech shares weighed on the Nasdaq, with Microsoft down 0.9 percent at $28.09 after the European Union fined the company $731 million for failing to offer users a choice of web browser. Google fell 0.9 percent to $831.38 after hitting an all-time intraday high earlier in the session.

The positive catalyst for Wednesday's advance came from signs of improvement on the jobs front. The slowly healing labor market has been one of the weaker spots of the recovery, but data on Wednesday showed private-sector hiring was surprisingly strong in February as companies added 198,000 employees.

It was an early look at the labor market two days ahead of the U.S. government's closely watched non-farm payrolls report on Friday, which is expected to show the economy created 160,000 jobs last month while the unemployment rate held at 7.9 percent.

The larger S&P 1500 .SPSUP has already reached record highs, thanks to help from smaller-cap companies. The Russell 3000 Index, which measures the performance of the 3,000 largest U.S. companies, also hit a record intraday high earlier in the session.

The CBOE Volatility Index rose 0.4 percent, after previously gaining as much as 2 percent on the day as investors snapped up protection on concerns that the rally may run out of steam.

Staples fell 7.2 percent to $12.34 after reporting lower-than-expected quarterly revenue and forecasting weak earnings for the full year.

Approximately 6.3 billion shares changed hands on the three major equity exchanges, below the daily average so far this year of about 6.48 billion shares.

Economic Data Continues to Look Good

Private employers added 198,000 jobs to payrolls last month, according to the ADP National Employment Report. There were solid gains in construction, where payrolls rose by 21,000. Hiring last month was spread evenly across small, medium and large businesses, the ADP report showed.

Private sector hiring in January had been skewed heavily toward small businesses.

Adding to the report's firm tone, January's count was revised to show 23,000 more jobs added than previously reported. The report is jointly developed with Moody's Analytics.

A separate report from the Commerce Department showed orders for manufactured goods dropped 2 percent, weighed down by a plunge in demand for transportation equipment. However, orders excluding the volatile transportation category increased a healthy 1.3 percent, pointing to underlying strength in a sector that carried the economy out of the 2007-09 recession.

The department also said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased by a more robust 7.2 percent in January instead of 6.3 percent, as it reported last week.

That optimism was also captured in the Federal Reserve's Beige Book, which showed growth improving gradually in January and early February, largely thanks to a broad-based housing market recovery. The signs of underlying strength in the economy are encouraging, given a recent tightening in fiscal policy.

A two percent payroll tax cut ended and tax rates went up for wealthy Americans on January 1, hurting consumer spending. In addition, $85 billion in federal budget cuts, known as the "sequester," started on March 1, and could cut as much as 0.6 percentage point from growth this year.

The ADP employment data may bode well for the government's more comprehensive labor market report, due on Friday. However, the ADP data has not always been a good predictor of the government report, which captures both public and private jobs. Also, the ADP report made no estimate of any impact from the snowstorm that buried the East Coast during the survey week for February nonfarm payrolls.

The gains in construction jobs evident in the ADP report underscored recent signs of an acceleration in the housing market recovery. Home prices have been rising since last February and the sector last year contributed to overall economic growth for the first time since 2005.