The week of March 5th saw increased optimism of an economic rebound amid data which offered evidence that the worst of the recession may be behind us. In addition, upbeat comments from Federal Reserve Chairman Alan Greenspan sparked a rally that carried the DJIA to new recovery highs. For the week the DJIA gained 204 points (+1.9%) and closed at 10572. Tech stocks powered the NASDAQ over 1900 as the index gained 1 27 points (+7.0%) and closed at 1929.
The follow-through in the major indexes has led to solid gains in our DOW and Small-Cap Value models, and it has prompted early buying in S&P 500, NASDAQ, Small-Cap Growth and International models. The growth elements of the Compass Portfolios have recently broken through key resistance levels, and have triggered limited (and disciplined) buying in vehicles that offer the potential for further gains. As always, we remain vigilant for signs of further weakness amid the possibility that corporate earnings may not recover as quickly as the data suggest. Our models currently favor the likelihood that further gains will occur, a position we are eager to embrace.
Breadth was strong as the NYSE Advance/Decline line gained 2785 units while the number of NYSE stocks making new 52-week highs exceeded those making new lows on all five trading days. Another positive sign continues to be the expansion of the number of NYSE new highs, which were in triple digit territory all week. This action reflects the broadness of the current rally and is a very bullish condition going forward. The number of NYSE stocks above their 200-day moving average jumped to 58.8% from 49.5%, as did those above their 50-day, surging to 62.3% from 46.3%. For the week ending 3/06/02, US equity mutual funds had inflows of $3.4 billion compared to outflows of $4.3 billion the previous week. Due to the strong move over the past week, we anticipate the market may need a breather, and we would view any profit taking early in the week as a normal occurrence.
Based on revised data, non-farm business productivity increased at a 5.2% annual rate in the fourth quarter, more than the 4.5% increase expected by Wall Street and the previously reported 3.5% increase in the quarter. Over the past year, non-farm business productivity has increased 2.0%. This was the largest quarterly increase since the second quarter of 2000 (6.7%). Unit labor costs fell 2.7% in the fourth quarter, versus a 2.0% decline expected by Wall Street and a previously reported 1.1% decline in the quarter. Over the past year, unit labor costs have increased 1.8%. Manufacturing productivity increased 4.1% in the fourth quarter, but has increased only 0.8% over the past year. Alan Greenspan characterized the revised productivity data as “too good to be a reliable number,” and suggested that seasonal factors may have led to the unusually strong number. However, productivity data may also be enhanced by a recognized employment phenomenon: during periods of corporate layoffs, less productive workers are dismissed ahead of productive workers, and thus the data may reflect the output of individuals capable of greater production.
Total non-farm payroll employment rose in February for the first time since July 2001 and at the fastest rate since February, 2001. In all, 66,000 jobs were added in February, more than Wall Street’s expectation of no change. The manufacturing sector remained weak for the nineteenth consecutive month. The unemployment rate fell in February to its lowest level since October 2001. The unemployment rate fell to 5.5%, from 5.6% in January. Wall Street had expected an increase to 5.8%. The three-month average level of the unemployment rate fell for the first time since November 2000. Average hourly earnings rose two cents in February, and have increased 2.5% (annualized) over the past three months and 3.7% over the past year. The index of aggregate hours worked for private industry increased in February, but has fallen 0.5% over the past three months (the lowest rate of decline since May 2001), and 2.1% over the past year.
Ongoing data will have to be analyzed carefully to identify and exploit sustainable trends in the national economy.