While earnings have been solid in recent years, many investors are waiting on the economy pick-up and though we are seeing some improvement in the jobs outlook, many analysts view those numbers with skepticism. Although January nonfarm payroll showed an increase of 243,000 jobs, the second consecutive month of better-than-expected job growth, and the unemployment rate dropped to 8.3%, that rate is somewhat skewed by the long-time unemployed (discouraged workers) falling out of the survey (see “Better, but still bad”).
Equities rallied following the better-than-expected January jobs number and Treasuries fell. Sorensen says the improving employment situation is helping stocks. “It’s certainly not a rapid improvement, but we are seeing better numbers — jobless claims are coming down substantially, and we’ve seen the unemployment rate come down. Everyone would like to see a more rapid pace, but things are improving,” he says.
In 2012, Sorensen is expecting information technology and industrials to outperform the rest of the market. He is starting to see investor flows out of defense, which outperformed in 2011, into more cyclical names as the economic data is improving. Conversely, Sorensen agrees that utilities will underperform and adds consumer staples to the list, saying valuations in both sectors are getting a little concerning after last year’s run in those sectors.
A Fed on hold
Considering that unemployment remains high, housing prices continue to bottom bounce and inflation lingers around negligible, it wasn’t surprising that the Federal Open Market Committee (FOMC) decided to keep rates steady at its January meeting.
Since last August, the Fed has maintained that it likely would keep rates low until mid-2013. Now, that time frame has been extended to late-2014. “The Fed still is on pins and needles like the rest of the market because, while the economy clearly is recovering, it’s not a robust recovery,” Larson says. “Historically, the deeper the recession, the stronger the rebound coming out of the recession. This particular recession was very severe, but the rebound has been below average.”
Springer says the Fed is hoping to see a trickle-down wealth effect occur by keeping rates historically low for so long. “All that liquidity has to go somewhere, and it speculates on stocks, which is what the Fed wants. It’s hoping people go out there and borrow to hire people, but it knows the wealth effect has a lot to do with it,” he says. “If the stock market goes up and people’s 401Ks go up, then people feel [wealthier] and they spend.”