Four days of worrisome running in place ended happily for the markets on Friday as the labor market appears finally to be catching up with strong growth in other parts of the economy. The release of the much-anticipated February payrolls report sparked a relief rally in stocks and bonds.
The economy added 262,000 jobs last month, slightly more than the average forecast but less than the high-end estimates being bandied about at midweek. It seems
Chairman Alan Greenspan hit it about right on Wednesday when he said the economy was "expanding at a reasonably good pace."
Stock investors liked the reasonableness and opened stronger after the report and -- unlike the prior three days -- managed to build on those gains. In fact, all the up and down earlier had left the major indices about unchanged, so Friday's rally defined the week.
Dow Jones Industrial Average
ended Friday up 1% at 10,940.55, its highest close since June 2001 and a 0.9% gain for the week. The
also gained 0.9% for the week, including a 1% jump on Friday, to finish at 1222.12. And the
rose 0.3% for the week, after a 0.6% gain on Friday, to close at 2070.61.
Basic materials, those cyclical companies that benefit most from accelerating growth, led the end-of-week move. Gold, coal, steel and forestry companies were at the very top.
gained 5%, and
rose 3%. Those are also industries that have been helped by surging commodity costs amid the weaker dollar.
Despite the optimism sparked by the jobs report, one has to go back only to October to see a similar level of job creation. The pre-Halloween 282,000 job surge sputtered quickly, and job growth averaged only 140,000 a month for the next three months. Whether February marks the start of a stronger trend remains to be seen, although all the pieces are in place.
"We will need to see several months of job creation of February's magnitude to feel comfortable with the labor market expansion," Economy.com managing director Sophia Koropeckyj wrote after the release. "The stage has been set for stronger employment growth, as business confidence has improved since the presidential election, productivity growth is slowing, and order growth, from domestic and global buyers, remains strong."
The bond market's minor rally, slightly less than the average move after the jobs report, according to Lehman Brothers data, had all the signs of short-covering in the classic "buy on the rumor, sell on the news" style. In this case, fixed-income investors got short as the whisper numbers for the jobs report started to exceed 300,000. That helped drive the yield on the 10-year up to an intraday week high of 4.41% on Wednesday from 4.27% last Friday.
Once the jobs report came out, not quite at the blowout levels some shorts sought, it was time to cover those bets. Treasuries ended up 17/32 for the day to yield 4.31%, up 4 basis points for the week. It didn't hurt that the unemployment rate increased slightly to 5.4% and average hourly earnings and the average work week were unchanged from January.
Unlike the past few job reports, Friday's did little to alter the consensus about coming Federal Reserve rate hikes. In the fed futures market, investors are looking for the fed funds rate to hit 3.25%.
That's the same steady-as-she-goes, 0.25 percentage-point hike at the next three Fed meetings that we've seen at the past six. Some minor speculation had crept into the market at midweek that the Fed might accelerate, but it drained out quickly after the February payrolls report hit.
Ultimately though, improving labor markets can hardly be good for bonds. The past few months have seen a strong surge in hiring plans in surveys taken by the National Federation of Independent Business, BCA Research, an independent firm based in Montreal noted on Friday.
"The February U.S. employment report confirmed that business risk-taking is on the upswing and above-potential growth will persist," the firm wrote in its daily commentary. Combined with the 6% increase in consumer income over the past year, strong labor markets will prompt the Fed to keep hiking "putting the financial markets at risk," they conclude.
The final worrywart of the week mention goes to Argus Research analyst John Eade. He sees too much money chasing too few profitable opportunities in many industries, a recipe for underperformance, consolidation and bankruptcy.
"While it is impressive that a company like retailer
Bed, Bath & Beyond
has the war chest to buy back stock, we were more encouraged several years ago when the company plowed its cash back into new stores, generating compound annual returns of 25% over a 10-year period," Eade wrote on Friday. "Those days are gone."
He highlights airlines, semiconductors, utilities, auto parts and automakers, retail, software and telecom equipment and services as all being in jeopardy.
Most of those industries have dedicated ETFs that could be shorted, but the bigger gains surely are to be won by finding the gems amid the wreckage, the survivors, the consolidators and the misunderstood. Perhaps a
is ready to beat expectations.
But then, separating the potential winners from the losers is what makes investing fun, isn't it?
I've had a great -- if too short -- time writing for
, but it seems my voyage is ended and I'm headed back to the world of tree-pulp journalism. Thanks to all the great writers, editors and contributors on the site and to the many readers who took the time to send me their feedback -- good and bad.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send