SAN FRANCISCO -- The market this week was like most members of the opposite sex (regardless of your gender): A mass of contradictions.
The bulls scored a victory as major averages crossed key psychological and technical levels, including the
Dow Jones Industrial Average
closing above 10,000 for the first time since early September and the
eclipsing 2000 for the first time since August. Supporters described Friday's setback as a natural or even "healthy" development following, noting that action on Fridays usually reverses the market's prevailing trend. But the skeptics were unbowed and viewed the stock market as becoming detached from a still-troublesome economic reality.
Friday's much weaker-than-expected jobs report for November had the
"not based on fundamentals" crowd in a lather. The government reported that 331,000 nonfarm payroll jobs were eliminated in November vs. expectations of losses of 189,000. The unemployment rate rose to 5.7%, its highest level in six years. Additionally, October's job loss figure was revised to 486,000 vs. 415,000 originally, making it the worst drop since December 1974.
Beyond the jobs report, the week's economic data were decidedly mixed. the National Association of Purchasing Management reports on manufacturing and services both were stronger than expected, as were construction spending and factory orders reports for October. The University of Michigan's consumer sentiment index, released Friday, also exceeded expectations. Conversely, reports on auto sales, person income, retail sales, jobless claims and productivity failed to meet expectations.
After some midday volatility, the stock market posted relatively modest declines Friday in the face of the bleary jobs report and news Congress has put talks on a fiscal stimulus package on hold indefinitely.
But Friday's setback couldn't spoil weekly results. The Dow Industrials rose 2% on its way past 10,000, while the
gained 1.7%. The Nasdaq Comp rose 4.7% for the week, surpassing its 200-day moving average in addition to the psychologically important 2000 barrier.
The tech-led move was fueled in part by cautiously optimistic comments from bellwethers such as
and -- later in the week --
Additionally, a bullish call on the semiconductor-equipment makers by UBS Warburg on Tuesday gave a boost to names such as
and underscored hopes the ever-elusive "bottom" in tech had finally arrived.
But Morgan Stanley chip analyst Mark Edelstone downgraded the chip sector on Friday, putting a damper on the group's advance. The Philadelphia Stock Exchange Semiconductor Index fell 2.2% Friday but rose 10.2% for the week.
The week's advance was mainly the result of the market's rise since Sept. 21. That may sound like a contradiction, but the market's gains compelled those short to cover and enticed fund managers trailing the market year to date to aggressively put money to work.
"Investing comes down to at some point a leap of faith -- I think the economy will recover, I believe the amount of liquidity injected into the system will work," said one hedge fund manager, who requested anonymity. "The worst is behind us, I truly believe it."
The manager expressed doubts that another "super-bull market" or 5% GDP is going to re-emerge, predicting instead a "trading range with a mildly positive bias" for the foreseeable future. But his main point being that "if you are going to manage money you can't be a gloom-and-doom pessimist."
Bond Market Says What?
Perhaps the week's biggest contradiction belonged to the bond market. While the short end of the yield curve focused on economic weakness and prospects for additional
easing next week, the long end acted as if robust economic growth, even inflation, is already upon us.
Although Dow 10,000 and Nasdaq 2000 will likely dominate the headlines, a key level also was breached by the benchmark 10-year Treasury note. After falling 1 3/32 to 98 26/32 on Friday, the 10-year ended the week yielding 5.16%, its highest level since early Aug.
To stock bulls, the bond market's decline is a clear sign the economy is recovering, and that may very well prove the case. The problem is that about a month ago, bulls were citing the bond market's rally (meaning falling yields) as a reason to buy stocks. As reported
here, falling bond yields make stock valuations more attractive according to the so-called Fed model. (Brian Reynolds recently took an
alternative look at the model itself.)
Based on current levels, the Fed model now indicates S&P 500 earnings would have to be $59 per share next year for the index to be fairly valued today, as my colleague Justin Lahart noted in
Columnist Conversation. The current Thomson Financial/First Call consensus is for earnings of $51.64 next year, and many observers believe that estimate to be overly optimistic.
This week again demonstrated the stock market's ability to ignore such fundamental developments if there's enough bullish momentum. But recent history has also shown such developments can only be ignored for so long.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.