Sunday, February 5, 2012

Markets Rally as U.S. Unemployment Drops and Global Manufacturing Avoids Contraction

Most global manufacturing data released last week suggested an expansion of manufacturing activity – (investors feared a contraction in China and Europe). On Friday, the U.S. Department of Labor said the unemployment rate fell to 8.3% (a three-year low) and payrolls increased by 243,000 in January (with strength in most sectors). At the same time, the labor force participation rate (people in the U.S .either working or looking for work - 16 years and older) dropped to 63.7% - the lowest level since 1983. In the U.S. equity markets, after 263 of S&P 500 companies reported quarterly results; earnings are up 3.3% and revenues are up 6.5%. Notably,, Inc. reported weaker than expected revenue growth (the stock took a strong negative hit) andFacebook filed for its Initial public offering (current investors are happy, prospective investors have concerns about valuation). 

Global markets continue to benefit from strong corporate profits, along with the positive effects of monetary policy by central banks in the U.S. and Europe. Regarding the declining and problematic labor participation rate, a persistently high 23.3% youth unemployment rate and other metrics suggest that a structural change may be underway. Regarding the markets, some participants and strategists, fearing they are “being left behind”, are becoming more bullish - while confronting the usual list of unresolved economic headwinds. Sometimes momentum begets momentum.

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