Stocks have proven the naysayers wrong so far in 2012. And the February jobs report could be just the ticket to keep the bulls going next week.
The five-month stock rally has been built on a string of improving economic data that suggests US corporate profit growth will remain intact, according to some analysts.
Job growth is a big part of that picture. It has lagged most other parts of the US economy, a point frequently raised by Republican presidential hopefuls. But strategists have been calling for a pullback, especially since indexes are hitting new milestones and the fourth-quarter reporting period is winding down.
The Standard & Poor’s 500 is up for eight of the last nine weeks. This week, the Dow closed above the 13,000 mark for the first time since May 2008, and the S&P 500 twice closed above 1,370, a closely watched technical resistance level. The Nasdaq at one point crossed the 3,000 level this week and is trading at its highest since 2000. Some say staying on this path may be possible with further supportive news on the economy.
“The rally will continue as long as better economic information continues. The question is, ‘Are we seeing some sustainable improvement in the economy?’ I think the answer is ‘yes,’ so I think there is going to be some continuation in the rally,” said Bryant Evans, investment advisor and portfolio manager at Cozad Asset Management, in Champaign, Illinois.
The government’s jobs report for February, due on Friday, is expected to show non-farm payrolls added 210,000 jobs last month, according to economists polled by Reuters, after gaining 243,000 in January.
That would mark three straight months of solid job gains. The US unemployment rate is seen steady at a three-year low of 8.3 per cent.
It would also be further proof the economy is on the upswing. Among recent upbeat data was this week’s report showing gross domestic product expanded in last year’s fourth quarter at an annual rate of 3 per cent - the quickest pace since the second quarter of 2010.
Oil raises a red flag
Investors are focusing more on economic data lately, with a bailout package for Greece in the works and US earnings news winding down. But rising oil prices could create some anxiety.
Concern about supply disruptions from Middle Eastern oil producers has kept Brent crude oil above $120 a barrel, and analysts said that could affect the longevity of the stock market’s rally.
“The economy has a pretty good head of steam, and a few data points here or there isn’t going to derail that. But if you have some exogenous shock from oil, all bets are off. Things can and do change in the short run,” said Doug Foreman, director of equities at Kayne Anderson Rudnick in Los Angeles.
Higher oil prices mean higher costs for consumers and businesses, and an even tougher time for Europe, which appears headed for a recession.
Greece’s second bailout from the euro-zone countries will be in place once conditions are finalized. The first of the money can be paid out after the completion of a bond swap between Athens and private investors, which is to be concluded by March 9. Those concerns aside, stocks’ gains year to date could be reason enough for investors to pull back. The S&P 500 has risen 9 per cent for the year so far.
“Once you start hitting targets, that tells you something,” said John Kosar, director of research with Asbury Research in Chicago.
“From a pure money-management standpoint, the S&P didn’t make any money last year. If you’re a manager and sitting on almost 10 per cent profit as of March 1st, wouldn’t you want to take a little bit off the table?”
The S&P 500 ended 2011 virtually unchanged.
The economy in the driver’s seat
But it’s hard to argue with economic data.A stronger US economy will create jobs and improve profits. That is seen as the key driver for the stock market’s gains. Even though the percentage of companies beating analysts’ profit expectations is down from recent quarters, earnings growth for the fourth quarter is still at 9.4 per cent, above a January 3 growth estimate of 7.9 per cent.
