NEW YORK (The Street) -- Wednesday's strong private payrolls report has added impetus for the Federal Reserve to continue weaning the U.S. economy off its stimulus-support line, fueling cautious sentiment among investors uncertain about buying stocks.
Payroll services provider, Automatic Data Processing, said private companies added 238,000 jobs in December, beating expectations for a gain of 205,000. Stocks were mixed Wednesday after closing higher Tuesday, reflecting ongoing caution as stock valuations are already high after a 26% gain for the S&P 500 in 2013.
Although few strategists expect a significant pull-back this year, the likelihood of continued stimulus tapering has tempered enthusiasm for equities following the best year since 1997. Bears point to the strong correlation between expansion in the Fed Reserve's balance sheet and market gains since the credit crisis, suggesting the support to stocks from stimulus cannot be under-estimated.
Today's jobs report - and a solid result from monthly payrolls on Friday - would be seen as justifying Bernanke's December decision to cut bond purchases by $10 billion to $75 billion from this month.
Paul Ashworth, chief US economist at Capital Economics, said monthly gains in employment of 200,000 would probably keep the Fed on its course of cutting its QE at each FOMC meeting this year. "But if we start to see gains of nearer 250,000, then the Fed would presumably wind down its asset purchases more quickly," he told clients in a note.
Others referred to earlier concerns that cold weather may have thwarted hiring in December.
"[But] perhaps that's a story for January as record low temperatures disrupt the economy," Andrew Wilkinson, chief market analyst at Interactive Brokers told clients. He noted that the 238,000 reading of jobs creation was the largest of 2013 and bolstered by upwards revision to prior monthly data.Construction employment had its largest single monthly jump since February 2006 while payrolls overall rose by the most since November 2011.
--- By Jane Searle in New York