Stocks ended their winning streak, preoccupied by the Friday jobs report, but quickly regained steam after data revealed a rosy jobs picture. For the week, the S&P 500 lost 0.04% (though it jumped 1.1% on Friday), the Dow lost 0.41%, and the Nasdaq gained 0.06%.
Economic data dominated most of the week’s action as investors waited for the latest news on job creation, economic growth, and manufacturing. Overall, the news was good. The November Employment Situation report showed a 203,000 increase in nonfarm jobs and a significant drop in the unemployment rate, from 7.3% to 7.0%. Even better, this drop was not driven by discouraged job seekers dropping out of the labor force. The data was supported by Wednesday’s ADP jobs report, which showed that private sector hiring rose to its highest rate in a year. Paired with October’s surprise gain of 204,000 new jobs, the data could show that the labor market is gaining steam.
At first glance, GDP data was positive, showing that the U.S. economy grew faster than initially estimated in the third quarter – growing at 3.6% (annualized) instead of the 2.8% originally estimated. However, digging deeper, most of the growth was due to businesses aggressively accumulating inventory, which they may or may not sell this quarter. Stripping out the contributions from inventory growth, the economy grew at 1.9%, rather than 2.0%. Consumer spending, which accounts for more than two-thirds of economic growth, was actually revised downward a fraction. In short, the economic picture is still mixed. Businesses are clearly confident enough about sales growth to stock up on products, but it’s unclear whether consumer demand will justify that optimism.
While investors gave in to economic worries last week, it’s clear that the money isn’t in any hurry to leave the market. Friday’s stock market gains are evidence of another buythe-dip run that we may see continue this week. The wild card is the mid-December FOMC meeting; the Fed’s Beige Book report showed that the economy grew moderately between October and mid-November, leaving the central bank in a policy quandary: To taper or not to taper?
The two most critical metrics that the Fed uses to gauge policy decisions are unemployment and inflation. The November jobs report shows stronger job creation and inflation pressures are muted, increasing the odds that the Fed may announce a December taper. We believe that it’s more realistic that the Fed will use its December meeting to clarify its timing and pave the way for a 2014 taper. While we can hope that the rally continues, it’s very likely that we’ll see more volatility as we approach the December 17-18 FOMC meeting and investors make bets on which way the Fed will move.
Wednesday: EIA Petroleum Status Report, Treasury Budget
Thursday: Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories
Friday: Producer Price Index
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Chinese exports beat forecasts. The November export report handily beat economists’ expectations, rising 12.7% year over year, and boosting evidence that the world’s second-largest economy may be stabilizing. Exports are critical to China’s economic growth and account for approximately 30 million jobs.
Consumer sentiment surges in December. Americans are feeling much more optimistic about the economy and their job prospects, the latest Thomson Reuters/University of Michigan consumer sentiment report shows. Even more important, nearly all the improvement was in lower-income households, indicating that the good cheer is spreading.
October new home sales strongest in three decades. Sales of new single-family homes leaped in October to their highest level in over 33 years. Keep in mind that September and October housing data was affected by the government shutdown and it’s very possible that this number is an outlier. Economists will have a clearer picture of the housing trend once November numbers are released.
Consumer credit rising faster than expected. Total consumer credit – which includes revolving credit like credit cards as well as fixed credit like auto loans – increased in October to its fastest pace in five months, a positive sign for holiday spending. Fortunately, though credit use is increasing, it is nowhere near pre-recession levels.
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