Jobs Data Expected to Ease Correction Fears in Coming Week


NEW YORK ( TheStreet) -- The threat of a significant market correction is expected to fade next week as investors anticipate data confirming continued improvements in the U.S. labor market.

Employment trends will be a focal point for the week. This first read on the labor market will come on Wednesday, when Automatic Data Processing releases its report on private-sector jobs for February. Analysts polled by Thomson Reuters expect ADP to report that companies added 200,000 jobs during the month, after an addition of 170,000 in January.

The Labor Department will follow up on Thursday with its weekly read on jobless claims. The number of Americans filing for first-time unemployment benefits is expected to fall to 350,000 from 351,000, according to an estimate from Thomson Reuters,.

The week's employment data will wrap up on Friday with the government's nonfarm payrolls report, which is expected to show continued growth, albeit at a slightly slower pace of 210,000 compared with an increase of 243,000 the preceding month.

"We continue to expect an above-consensus number," says Phil Orlando, chief equity market strategist at Federated Investors, of the nonfarm payrolls number. While the consensus for February non-farm payrolls sees an increase of 210,000, Orlando predicts that it will be higher at 225,000.

"Generally speaking, the continued positive trends in claims for the last four months continues to suggest that the labor market is going to improve," he added.

The unemployment rate now holds steady at 8.3%, but Peter Cardillo, chief market economist at RockwellGlobal.com, says that there will be more improvement in hiring when there's more clarity on how steep the recession in Europe is going to be. "That is one of the reasons we're not seeing more aggressive hiring in the U.S."

The S&P 500 and Nasdaq have been trading at 52-week highs, staging their best start to the new year since 1987. The S&P is up 28% from the bottom of the bear market last October. That far exceeds the momentum that Orlando had been predicting. His firm's forecast at the start of the new year was that the S&P 500 would grind higher to between 1350 and 1370 by the middle of the year, but the benchmark index has already achieved this two months into the year.

For the full year, his team has been looking for the S&P to reach 1450. With only a 10% move to go before the index reaches this level, a correction may be in store -- but the correction would likely be a healthy 3% to 5%, according to Orlando. He believes it would create buying opportunities in stock stories linked to the domestic recovery, particularly in technology, financial and consumer discretionaries.

Bears believe that Middle East tensions and the spike in crude oil and gasoline prices, as well as a potential hard-landing in emerging market growth economies, could lead to a much more severe correction in the markets. However, Orlando and Michael Gayed, chief investment strategist at Pension Partners, see these views as flawed.

"I think the bears are just talking their books, hoping investors will sell and knock the market down 10% so that the 'hedgies' can put money to work at better prices," warns Orlando.

"The pullback fear is caused by those who are in shock that they've missed the rally," Gayed seconds. "They're hoping for a pullback because there's a real feeling of regret."

"We're told that high oil prices is a problem," Gayed continues. "Every day we're told it's going to bring down the economy and the markets, but that's not consistent with retailers being at new all-time highs and that's not consistent with the consumer discretionary sector still outperforming."

While the media is focusing on oil as the "new Greece," the reality is the market isn't concerned with it, Gayed asserts. "Oil prices going up is actually inflationary, and the market actually likes it."

Gayed's forecasting models show that the market continues to be in "risk-on" mode in a favorable environment for stocks, whereby inflation expectations keep rising. He now likens the markets to a car that isn't at risk of crashing because the severe weather conditions -- namely a deflationary environment where liquidity has been sucked out -- aren't there to cause it. "The monetary spigots are really at the loosest as they can be," with the European Central Bank offering unlimited funds as part of what's essentially a huge refinancing plan at a rate of just 1% with the proper collateral.

As risk appetite increases, investors are showing more and more interest in gaining emerging market exposure through exchange traded funds to reap the benefits of growth economies most sensitive the worldwide economic recovery, Gayed continues.

"If history's any guidance, any kind of pullback in an environment of global reflation is very shallow," he said. Since 2003 as well as 2009, following the Lehman demise, when central banks and monetary authorities turned on their spigots for fear of an economic collapse, the S&P 500 has soared over 50%.

As central banks continue to intervene to help stimulate the economy -- China still has room for much more aggressive stimulus measures and Federal Reserve chairman Ben Bernanke has taken on more hawkish rhetoric in a delayed response to the improving domestic situation -- the markets themselves have been demonstrating the powerful ability to remove stresses and strains from the financial system at a scale even larger than that of the central banks.

"Regardless of the form of quantitative easing that's being carried out by central banks , it pales in comparison with the amount of money created in the stock market globally over the last few months," he continues. The S&P has added more than $3.2 trillion to share values since October, according to Bloomberg data, making the hundreds of billions of dollars going into the European financial system and elsewhere seem like "nothing." From January, the S&P has staged closer to a $3.5 trillion increase and $3 trillion was added to global shares in just January.

Investors will also be watching for "the strength of company-specific earnings growth" to help sustain the market rally, said Zafran.

A number of other economic reports will also be published next week. Factory orders for January will be published Monday by the Census Bureau and should show a slide of 1.6% after a jump of 1.1% in December. The Institute for Supply Management's non-manufacturing index, coming in at the same time, should show a reading of 56 for February after rising to 56.8 in January. Readings above 50 signal expansion.

International trade numbers, scheduled to be released by the Census Bureau and the Bureau of Economic Analysis at the same time as the nonfarm payrolls number at 8:30 am Friday, should show that the U.S. trade deficit widened to $49.1 billion in January after deepening to $48.8 billion in December.

"On the corporate side, investor reaction to Apple's ( AAPL) much-anticipated release of the iPad 3 tablet will be worth monitoring," adds Zafran.

Urban Outfitters ( URBN), Outdoor Channel ( OUTD), Ciena ( CIEN) and Buckle ( BKE) are among the companies reporting quarterly earnings next week.

-- Written by Andrea Tse in New York.

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