Stock prices advanced another 0.3% (DJIA) to 0.8% (Nasdaq) Wednesday, with the S&P 500 big-cap benchmark stretching its 2011-to-date gain by 0.5% to 1.5%. The news was good from before the open, when ADP reported that its data indicated that 297,000 jobs were added to private payroll in December. There may be some seasonal problems with the data that may keep it from being the best indicator of this Friday’s Labor Department private payroll numbers, but the outsize ADP increase has already pushed the consensus estimate for the increase in nonfarm payrolls toward 200k, which would be the best jobs news in eight months. At 10:00 EST, the ISM purchasing managers’ survey for service industries came in at the highest reading since midyear 2006, with its new orders component making a five-year high. Not long after the ISM report, stock prices moved into positive territory, building on these gains for most of the remaining six hours of trading. Commodities prices were firmer today, but gold failed to participate as the dollar rallied against both the euro and yen.
The strong economic data took bond prices lower, with the 10-year T-note losing about a point, its yield touching 3.46%. The bond market appeared to accept the ADP payroll report at face value and lent little credence to the one negative trend evident in both ISM surveys, the employment readings. In both the manufacturing and service sector surveys, the employment components turned lower in December, although both readings were better than the 50% breakeven rate and thus still indicating expansion of payrolls. But the service sector reading, which is several times as important as manufacturing in terms of number of jobs, dipped from 52.7% to 50.5% last month. To some extent, these less positive readings offset the stronger indications seen in the reduced number of initial jobless claims recently, so that we would not get too carried away in advance of the nonfarm jobs report out on Friday. While the majority of recent economic data have had a positive tilt (outside of housing), there will no doubt be the occasional untoward release in the weeks ahead to slow down the stock market’s recent tear.
INVESTMENT OUTLOOK…Despite the fourth quarter’s escalation in inflation expectations and bond market volatility, a respectable year-end rally in stocks was fashioned out of improvement in leading economic indicators and, in the United States, perhaps a sense that the two parties in Washington may be able to accomplish something positive in 2011. It is important to remember that at some point the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and we judge the profits outlook for 2011 to be good. With respect to bonds, we are not completely comfortable with the near unanimity reflected in the markets during the fourth quarter that interest rates can only go higher in 2011. Stock market volatility has receded from the awful levels of 2008-09, but we would not be surprised if there are occasional bouts of volatility popping up through 2011.
Copyright © 2011 by Wright Investors’ Service, Inc.