The exuberance exhibited by stock prices Thursday turned out not to be fully warranted by the February employment report, and the Dow and S&P 500 each dropped 0.7% on the day. If Thursday was a risk-on trading session, Friday was risk-off – which was a little hard to fathom in that, on balance, the jobs numbers were in line with expectations. To be sure, though, they were not as good as seemed possible after a week of strong indications on the jobs front (ISM manufacturing, ADP private payrolls, jobless claims, ISM nonmanufacturing). Stocks weren’t too weak at the open, but selling pressures built during Friday trading, and crude oil climbing to nearly $105 a barrel (+3% on the day) certainly didn’t help. A late-day rebound trimmed the market’s losses by almost half, just enough to keep the S&P 500 in the black for the week with a 0.1% gain. The Dow (0.3%), S&P MidCaps (0.5%) and S&P SmallCaps (0.5%) had slightly bigger advances for what was a fairly volatile week. VIX averaged 20% for the week, down a touch from the prior week (when the S&P 500 lost 1.7%), but up from the 17% averaged over the first seven weeks of the year. Libya has obviously been a factor in the elevated volatility.
Private nonfarm payrolls increased 222,000 last month, and prior months’ figures were revised modestly higher; in addition, the unemployment rate took a surprising dip to 8.9% from 9.0% in January. Aggregate hours worked in February increased and with a continuation of the good productivity gains, Q1 2011 should see GDP growth on the order of 3.5%-4%, in our estimation. The jobs improvement in temporary help services was a bit disappointing and retailers let a net 8,000 workers go during the month (maybe weather was still a factor). What’s more, state and local government continues to be a jobs sieve, with 30,000 jobs budgeted away last month. The fact that average hourly wages were flat for the month, and up only 2.1% over 12 months (or about the amount that productivity has increased) shows that unit labor costs remain tame. Treasury bonds took the inflation indications well (ignoring the rise in oil prices), and the 10-year T-note climbed one-half point on the day, its yield falling to 3.49%, down seven basis points for the day but up eight bps on the week. Gold rose not quite 1% on the day.
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.