Energy, materials and health-care shares led the broad market’s advance.
Health-care stocks have closed lower in 11 of the past 14 sessions on government proposals to change the structure of Medicare Advantage, force pharmaceutical firms to offer more rebates to Medicare recipients and increased talk regarding universal health-care. The shares managed to gain ground on Friday, however, on the news more consolidation will occur, which was exactly right as Merck has agreed to buy Schering-Plough for $41.1 billion in cash and stock – news that broke this morning.
Energy and material shares have caught a little life lately as these industries will be the likely beneficiaries of global stimulus projects; investors may also be gearing up for the inflation trade as this is what will occur via the massive amounts of liquidity the Fed has pumped into the system – the way the government is engaging in stimulus will combine with the Fed’s action to increase the rate of inflation to harmful levels down the road. Still, we’ll see this trade lose steam several times, in my view, as economic issues (to put it mildly) will cause doubt but it’s just a matter of time. The Fed will watch inflation rise and won’t do a darned thing about it for if the housing market is in the early stages of a rebound they won’t want to shut that down via higher interest rates.
For the week, the broad market lost 7%, marking the fourth-straight week of decline that has pushed the S&P 500 down 21%. Financial shares, big surprise I know, led that decline as the index that tracks these shares has plunged another 38% over that four-week period.
Market Activity for March 6, 2009
The Jobs Report
The Labor Department released the February jobs report Friday morning and no one found a silver lining – although we see a possible bright spot. No doubt the vast majority of the report was abysmal, but the whisper number was far worse than printed and the household survey showed a large reduction in the rate of decline. We’ll explain below.
According to the report, payroll positions fell 651,000, smack dab in line with the estimate of a 650,000-position loss. The previous two months were revised down totaling another 161,000 in job losses. Over the past three months, payrolls have fallen at the fastest pace since February 1975.
The unemployment rate jumped to 8.1% in February, which is the highest level since 1983, from 7.6% in January.
There are two separate surveys connected to the jobs data. One is the payroll survey, which shows the headline number of jobs gained or lost – this is the number you read about in the paper or online. This survey includes 400 major businesses, but excludes the self-employed. The other is the household survey, which includes the self-employed and is the number for which the unemployment rate is calculated.
This household survey showed a loss of 351,000 in February, a rate of decline that is substantially lower than the prior three months – down 1239K in January, -806K in December and -799K in November. So that’s one good sign. The other is the fact that the civilian labor force rose, meaning people began looking for work again. While the unemployment rate reflected this, it is much better than what we’ve seen over the past few months, people removing themselves from the labor force (by not looking for work during the four weeks prior to the survey – what’s referred to as “discouraged workers”) and yet the unemployment rate was jumping nonetheless. It is too early to say this with conviction, but just maybe we’re seeing light at the end of the tunnel here. I’m reaching for optimism, but why not – it’s important to acknowledge anything that offers some positive scenario.
(Just to clarify, it would have been far worse to see the unemployment rate rise again even as more workers removed themselves from the labor force because this would mean an additional spike in the jobless rate will be upon us as these workers come back in to look for work. This is not to say the unemployment rate has peaked, because it most surely has not; yet this event does offer some sign the jobless rate will not rise as fast as it has over the past several months.)
According to segment, declines in payrolls were broad based as every category fell, save health and education – the only component of the report that has yet to show a decline during this labor-market contraction.
Service-producing payrolls led the decline as the area shed 375,000 positions – in line with the average of the previous three months. Professional and business services shed 180,000.
Goods-producing payrolls declined 276,000 – an improvement from the 324,000 average decline of the past three months. Manufacturing shed 168,000 and construction lost 104,000.
Hours worked fell 0.7% last month – manufacturing hours were down a significant 2.0%. Average hours worked for the first two months of the year were down 8.2% at an annual rate compared to the fourth-quarter average.
Average hourly earnings rose 0.2% in February; the year-over-year figure slowed to 3.6% from 3.8% in January.
We’ll point out though that real disposable income (after-tax, inflation adjusted) has jumped to 3.3% on a year-over-year basis, which is above the long-term average. As we engage in the policies we are about to embark on, inflation will likely rise to levels that are not helpful and real income growth may very well be lower than we have been accustomed to – so the currently positive rates may not last for long. For now though, it is a major positive for the consumer and we’ll take anything that will help consumer activity rebound.
Unfortunately, what we are doing in terms of policy is not a long-run strategy. We are ignoring the benefit of making hard choices today, choices that may cause the recession to drag on for a few more quarters, yet will put us in a more competitive stance when we come out of this cycle. Instead we are doing the opposite, engaging in plans that will likely give us a short-term boost, but will make us less competitive over the next few years – higher tax rates, more regulations and government spending as a percentage of GDP (moving to 27%-30% of GDP from 18-20% of the past quarter century) are not the best ways to allocate resources and incentive capital (which is extremely mobile these days) to flow into the U.S.
Have a great day!
Brent Vondera, Senior Analyst
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