— “Calling the Trend” Column, by George Leong, B. Comm.
Markets appear to have received a fresh catalyst to move higher. The key non-farm jobs report fell by a mere 11,000 in November, much better than the 125,000 estimate. Moreover, the unemployment rate fell to 10% from 10.2%. This is very positive news, but we need to see this continue into December and 2010 with job gains. Should this happen, it would really give the market a boost heading into 2010. Improving jobs means increased confidence, and could lead to higher spending and GDP growth.
The private ADP Employment report was weaker than expected, with the loss of 169,000 private jobs in November, an improvement over the 203,000 lost in October, but worse than the estimate of 150,000 job losses. The positive spin in this is that it would be the eighth straight month of lower job losses. Again, improving jobs means increased confidence and could lead to higher spending and GDP growth.
In the housing market, sales agreements for home sales were stronger than expected and at their highest level since March 2006, but the ISM Index expanded at a lower than expected rate in November. The positive is that the ISM continues to point to manufacturing activity improving, which is what is important at this time. Again the strength is a concern.
A significant area will be retail sales, since it accounts for about 70% of GDP in the U.S. versus about 20% in China. As of December 3, the retailing sector is showing some early weakness in the November results. Of the 15 retailers reporting so far, 11 fell short of Street estimates. Black Friday saw flat sales growth, but online sales were strong. As I have said, consumers may be waiting for larger discounts before buying; yet, due to stricter inventory control this year, there may be a run on goods in the holiday season, so there may be less discounting.
At the monthly Beige Book address, the Fed was upbeat about the economy and the low inflation, which should allow the Fed to leave interest rates near zero into 2010. However, the concern is that, by saying rates will stay low, this suggests that the economy is not growing that fast and could face more hurdles. This is what is concerning traders. The market is pricing in stronger growth, so there could be some issues in 2010.
The economy is clearly showing signs of improving, and the jobs report was what was needed at this point to maybe give a shot to stocks. However, keep in mind that markets have been rallying since March and much of the news has been discounted into the gains. For markets to edge higher, we need to see continued positive news, especially in retail sales. Take a look at the key November retail sales data, which came out on Friday.
My feeling is that we should continue to ride the rally, as the downside risk appears minimal at this time given the decent support we have seen.