Strong January jobs report enables Dow to reclaim 20,000

An argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values. – Warren Buffett

After falling below the 20,000 level earlier in the week on concerns over President Donald Trump’s immigration policies, the Dow Jones Industrial Average reclaimed the 20,000 milestone by week’s end after the better-than-expected January employment report. To be sure, all of the major stock averages just managed to get back to the levels where they began the week as the Dow, S&P 500 Index and the Nasdaq Composite Index all posted gains of only 0.1% for the week. The market got off to a rocky start when Trump issued an executive order on Monday to use extreme vetting procedures, an immigration policy that caused uncertainty and confusion. Investors were also disappointed that they had not heard anything yet about Trump’s proposed tax cuts, fiscal spending and regulatory reform, especially as it relates to Dodd-Frank and the financial industry. The ADP private payrolls report issued on Wednesday was a precursor to the strong January employment report as it showed solid job growth across all industries and company sizes. As expected, the Federal Open Market Committee (FOMC) also announced that there would be no change in interest rates. But the government jobs report released on Friday provided the biggest catalyst for stocks as 227,000 jobs were created in January, far more than the 175,000 that had been forecast. Although the unemployment rate ticked up to 4.8%, the increase actually occurred for a good reason as more people out of work looked for jobs. There also was very little in the way of wage pressure in the report as average hourly earnings increased by only 3 cents or 2.5% on an annualized basis. Investors applauded this news as it meant that inflation pressures were absent, a condition that would enable the Federal Reserve to likely remain on hold with regard to raising interest rates. Such a scenario also gives investors more time to assess the effectiveness of Trump’s pro-growth policies.

Last Week

The other economic data released last week was decidedly mixed. The Chicago Purchasing Manager’s Index (PMI) reading for January came in below expectations and was at the slowest pace since last spring. The January ISM manufacturing index for January as well as the ISM non-manufacturing or services sector index were both comfortably in expansion territory and in line with estimates. December construction spending fell modestly and trailed expectations while December factory orders were better than forecast and showed that manufacturing activity had accelerated. Consumer confidence in January was slightly below estimates due to a less optimistic outlook for business conditions, jobs and income prospects.

As part of its statement to leave interest rates unchanged, the Fed also said that the economy is showing moderate growth but that business investment remains soft. It acknowledged that business and consumer sentiment had improved but remained cautious and wanted to see this confidence manifest itself in the form of stronger growth. The focus is now on fiscal policy out of Washington as monetary policy has taken a back seat.

For the week, the Dow Jones Industrial Average edged up 0.1% to close at 20,071 while the S&P 500 Index also added 0.1% to close at 2,297. The Nasdaq Composite Index ticked up 0.1% to close at 5,666.

This Week

Economic data this week will be unusually light. January import prices are expected to rise modestly and confirm that inflation remains benign. The preliminary University of Michigan consumer sentiment index for February is forecast to be slightly less than the previous month but still indicate that consumers remain confident about the economy. Several Federal Reserve presidents are scheduled to speak about monetary policy and the economy.

This will be another busy week for quarterly earnings reports as Sysco, Archer Daniels Midland, Kellogg, Yum! Brands, Whole Foods Market, Coca Cola, CVS Health, General Motors, Time Warner and Viacom are some of the most prominent companies due to report.

Portfolio Strategy

There is an old saying that says as January goes, so goes the stock market for the year. If this theory holds true, then 2017 promises to be another positive year for stocks. All three of the major stock averages finished the month of January with positive returns, with the S&P 500 Index posting the best return with a gain of 1.8%. Going back to 1972, this indicator has been accurate about 88% of the time and is even more reliable in a year following a presidential election. The fact that the S&P 500 Index was also up in the first five trading days of the year is another positive omen for stocks. But before an investor gets too comfortable with these statistics, he must also consider that a normal 5% correction in the S&P 500 Index has occurred about every 7 months since 1932. It’s now been about 11 months since the market has experienced a 5% correction. While there is a lot to be optimistic about with respect to the economy and President Donald Trump’s pro-growth policies, investors should be cautious about investing any new money in the stock market at these levels. History also shows that the month of February has been a lackluster month for stock returns.