Stocks roared ahead Thursday, with the S&P 500 advancing 1.7%, its biggest one-day gain of the year, not much more than one week after its weakest day of the year. Stocks got off to a strong start after this morning’s weekly jobless claims report showed claims falling to their lowest level since July 2008. The ISM purchasing managers’ survey for service industries, released at 10:00 EST, added to the market momentum, showing as it did a healthy level of new orders and employment. February retail sales reports were also generally better than expected. An unconfirmed report that Libyan dictator Gadhafi was considering some sort of “golden parachute” deal sent oil prices a bit lower, which also buoyed stocks. With stocks benefitting from the return of the risk-on trade – amazing how a few days can change market psychology – Treasury bond prices fell by about two-thirds of a point at the 10-year maturity mark.
All of this improvement in the stock market’s psyche will go for naught if Friday’s employment report comes in on the weak side again. Practically all of the important employment indicators – ISM manufacturing, ADP private payrolls, jobless claims, ISM nonmanufacturing – have recently come in on the strong side, setting us up for a disappointment if tomorrow’s Labor Department report on employment conditions in February is a bust. There is also the possibility that it might be a blowout report, which may or may not be what stock investors would like to see, since if it’s too strong, concern about impending Fed tightening will no doubt result. Right now, Bloomberg says the Street consensus is for around 200,000 new jobs to have been created last month. Of course, if the payroll numbers don’t measure up to expectations, stocks could always rally on expectations of QE3 or some other new Fed monetary accommodation. Don’t you love markets?
INVESTMENT OUTLOOK…For the moment, corporate earnings prospects remain positive, which is providing the majority of support to stock prices. On top of the risk that inflation goes higher and puts downward pressure on P/E multiples, there is also the risk that Libyan unrest might spill over to other, more important oil producers, in which case the profits expansion may get sidetracked. Either way, stock prices may be in for some short-term selling pressures. Market rallies rarely continue in a straight line, particularly not after a doubling of stock prices such as we’ve seen over the past two years. We would view a moderate correction in stock prices as natural at this juncture, and it may well be a buying opportunity should events in the Middle East go in the direction of Tunisia/Egypt/Bahrain rather than Libya.
Copyright © 2011 by Wright Investors’ Service, Inc.