The stock market has been steadily making gains from late-August onwards as it became clear that the Fed will not let the summer slump take hold. Much improved readings on the health of the economy reassured the market and helped the rally along. The extension of the Bush tax cuts and enactment of fiscal stimulus measures gave the recovery a nice helping hand.
All of this combined provides a useful context for what we have been seeing in the market, particularly in the second half of the year. Following quite solid gains in December, the year-to-date gains for the S&P 500 have around 13%. Nasdaq has done even better, with gains of about 17%. Even more impressive has been the performance of the small-cap stocks, with the Russell 2000 moving up more than 26%. Stocks in industries with leverage to a recovering economy have been the star performers.
With the outlook for the all-important U.S. consumer looking up, the consumer discretionary sector has been performing very strongly. But to sustain and build on those gains, we need to bring down the unemployment rate. We have been making progress in that respect. After all, the U.S. private sector generated approximately 1.1 million private sector jobs in 2010.
And while the November nonfarm payroll report was a disappointment, the weekly Initial Claims numbers have been steadily coming down in the last few months. This key series had been improving up to the spring months, but then reversed course and got close to the 500K level in early fall. It has thankfully been moving in the correct direction since then.
Today’s Initial Claims report was a standout, the best in over two years. The weekly level dropped to its lowest level in a long time – to 388K. This compares to expectations of around 418K and the 420K level in the last few weeks. But before we get overly excited about today’s number, we should keep seasonality factors in mind. Today’s report pertained to the Christmas week, which is always difficult to properly handle.
Seasonality aside, this is a very good report, which should help the market maintain its recent positive tone. Overall, the market appears to be in a wait-and-see mode as far as the labor market is concerned. For a breakout upside from current levels, the market needs to see consistent labor-market gains at a pace faster than the recent past. Today’s report, while helpful in that process, will not get us there. But be wary of sharp moves in the market in a thin-trading environment.
I am signing off on 2010; we will touch base on Monday next time.
