Thursday, March 24, 2011

Stocks should get a lift from today’s positive labor market report, offsetting the re-emergence of the European sovereign debt problem. 

Today’s positive weekly Jobless Claims report reinforces the favorable trend of the last few months, indicating that a labor-market turnaround is likely under way. While the Durable Goods report came in weaker than expected this morning, the overall trend on the manufacturing side of the economy has consistently been strong for awhile now. 

The key holdout on the domestic economic scene has been the labor market, and recent developments on that front have been encouraging. Initial Jobless Claims numbers continued to stay below the 400,000 level, falling 5,000 last week to 382,000. Even the more stable four-week moving average dropped, reaching its lowest level since the summer of 2008. This favorable trend in the claims data should reassure the market of positive momentum in the labor market.

Stocks need reassurance that the U.S. recovery is stable enough to withstand the dark clouds from abroad in the shape of high oil prices, disaster in Japan and problems in Europe.  

The debt problems from across the pond had receded to the background for awhile but appear to be on track for a comeback, with Portugal becoming the third country after Greece and Ireland to get bailed out. The Portuguese government failed to convince parliament to enact a stringent austerity plan that was aimed at tackling the country’s wobbly finances. With the government stepping down following its parliamentary failure, the odds of an EU/IMF bailout have increased significantly as reflected in surging yields on Portuguese government bonds.    

Sheraz Mian
Director of Research
 
Zacks Investment Research