Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it. – Warren Buffett
After a disappointing employment report in December, a bigger than expected decline in durable goods orders for December and a weak ISM manufacturing index to start the week, investors were beginning to doubt the strength of the economy. Manufacturing along with the housing market had been one of the bright spots in the recovery but the surprisingly weak number sent stock investors scurrying for cover as the stock market plummeted more than 2% on Monday and was down about 6% for the year by mid-week. Suddenly, the January employment report took on even greater importance, as investors feared that the correction might accelerate with a poor jobs report. With economists forecasting an increase of about 180,000 new jobs, a number much less than that would be cause for concern and reason enough for investors to dump stocks. Sure enough, in keeping with recent weak economic data, only 113,000 new jobs were created in January. While stock index futures initially went from positive to negative on the headline news, investors took a second look and decided to view the glass as half full rather than half empty. They noticed that the unemployment rated ticked down to 6.6% while the labor force participation rate edged up to 63% from 62.8%. They also rationalized that the brutally cold winter must be partly to blame for the disappointing jobs number and ultimately just shrugged it off. Sensing that the correction had run its course, investors piled back into stocks as the market climbed over 1% on the day and actually was up for the week, its first weekly gain in a month. And many people were left scratching their heads on how such a weak jobs number could translate into such a positive day for the stock market.
The ISM manufacturing index fell to 51 in January, much lower than the estimate of 56, and caused the stock market to slide on the news. Although most observers blamed adverse weather conditions across the country for the weak report, stock investors chose to sell and ask questions later. It was the lowest reading in eight months and caused economists to doubt the strength of the manufacturing recovery. Factor orders also fell by 1.5% in December, causing further concern.
Both the Automatic Data Processing (ADP) report that showed private companies added 175,000 in new jobs in January and the decrease in jobless claims of 20,000 for the previous week caused investors to be optimistic about the government employment report. Although the jobs number was much less than expected, the unemployment rate of 6.6% is at the lowest level since October 2008.
For the week, the Dow Jones Industrial Average rose 0.6% to close at 15,794 while the S&P 500 Index climbed 0.8% to close at 1,797. The Nasdaq Composite Index increased 0.5% to close at 4,125.
Of the economic reports on tap this week, the most anticipated one will probably be the retail sales report for January, which is expected to show an increase of only 0.1% as severe winter weather again probably affected results. But the end of winter is definitely in sight as Major League Baseball begins spring training this week with pitchers and catchers reporting to camp on Thursday.
Tuesday marks the first appearance of Federal Reserve Chair Janet Yellen before the House Financial Services Committee as she begins testimony on monetary policy and the state of the economy. It is considered likely that she will continue the policies of her predecessor, Ben Bernanke, in trimming the monthly bond buying in $10 billion increments.
Earnings reports for the fourth quarter continue this week and leading the way are companies such as CVS Caremark, Ingersoll Rand, Whole Foods Market, Cisco Systems, Deere & Co., PepsiCo and American International Group.
The primary focus this week will be on the new Fed Chair, Janet Yellen, and her assessment of the economy and current monetary policy. Economic growth, inflation and the labor market have been key components of the Fed’s monetary policy and consecutive weak monthly jobs reports will certainly be addressed at the meeting. While the Fed will likely continue winding down its monthly stimulus program by $10 billion, further economic weakness certainly would call into question this policy and the need to slow the rate of reduction. With inflation running at 1.2%, the Fed is likely to remain accommodative by keeping interest rates low, despite improvement in the unemployment rate to 6.6%, a notch above the Fed target of 6.5%. In fact, the federal funds rate will likely remain near zero for the balance of this year. With better than expected fourth quarter earnings, low inflation and continued easy monetary policy with regard to interest rates, it appears that the stock market has regained its footing, at least for the time being. Although the market fell short of the much-anticipated 10% correction, it’s likely that such volatility will be with us for much of the year.