By Joseph Hogue, CFA
The market rocketed to above 1,344 last week on a surprisingly strong jobs report and stronger manufacturing indices around the globe. This is already above the consensus estimate of 1,338 on the S&P 500 for year-end 2012 reported by Bloomberg Businessweek last month, leading many to wonder if some profit-taking is in the cards.
The 13-year average annualized gain for the S&P 500 is 7.2%, just 0.3% more than the increase in the market since the beginning of this year. Companies in the S&P500 made about $98.80 per share last year, bringing valuations to about 13.6 times trailing earnings. While this is below the 50-year average earnings ratio for the benchmark of 16.4, it is still well above October's selloff to around 11.5 times.
The employment situation report showed a continued momentum for the job market with 243,000 jobs added in the last month. Weakness continued in the federal and state government sectors with a loss of 14,000 while the private sector added 257,000 jobs. While the unemployment rate did fall to 8.3%, much of this was due to a drop in the participation rate as unemployed workers get frustrated and stop looking for work. Construction was up 52,000 over the past two months due to above average temperatures and 113,000 of last month's increase came in sectors paying lower wages like retail, construction, and leisure & hospitality.
While the report may be weaker in months to come, it is still good news for stocks of hiring agencies like Monster Worldwide (MWW). Shares for the $898 million online jobs company have taken a beating over the last year, down 60.5% from the 52-week high. The company posted a gain of $0.11 per share in the fourth quarter, an increase of 83% over the same period a year earlier but missing consensus estimates. Shares were up 1.1% Friday on strong employment data.
Despite continued uncertainty in Europe, the global purchasing managers index (PMI) increased in January to 51.2 from 50.5 as Brazil, China, India, and the United Kingdom all reported strong numbers. Though momentum is to the upside most countries and regions remain dangerously close to the 50.0 delineator between growth and contraction. With asset prices climbing along with optimism, any report under 50.0 could send equities tumbling in their respective country.
Austerity measures in Europe and the United States should keep growth lower than potential over the next year and traders should keep an eye on important economic releases for surprises to consensus.
Light Week for U.S. Data
Next week is a relatively light one for U.S. data with wholesale inventories out on Thursday and trade numbers and consumer confidence on Friday. Inventories have increased by 10.5% over the last year and may begin to hold back manufacturing if sales do not pick up.
Exports have declined for two consecutive months leading to an increase in the trade deficit in November to $47.8 billion. Though imports have fallen on a drop in oil prices, slowing global demand has pushed exports down even further. A continuing deficit could act as a headwind to dollar strength as importers sell the currency to buy foreign goods. Investors should diversify their investments into assets denominated in other currencies, particularly those in emerging markets, to hedge the loss of dollar purchasing power.
The WisdomTree Emerging Markets Local Debt Fund (ELD) provides investors with access to bonds issued by foreign companies and governments and helps mitigate the effect of the falling dollar. Holdings in the fund are fairly diversified with Latin America (31.1%), Asia (41.4%), and EMEA (27.4%). The fund pays an income yield of 5.3% per share.
Consumer sentiment has been heading higher over the last few months as the improving stock market enables consumers to loosen their purse strings. The index is not close to its post-recession highs boosting sales for retail establishments.
China and ECB to Take Center Stage
Chinese inflation will be reported on Wednesday and should show stabilization over last month's reading of 4.1 percent. This will give authorities in China the ability to ease monetary policy and could affect commodity prices and shares of Chinese companies.
The European Central Bank (ECB) meets on Thursday of this week and is widely expected to keep rates at 1.0% though the risk is clearly to a surprise cut. Economic activity is forecasted to contract across the region this year and a cut to rates could help increase lending and depreciate the euro, making exports more competitive.
SOHU.com (SOHU) is expected to post fourth quarter earnings of $1.24 per share on Monday, an increase of 15.9% over the same quarter last year. The $2.4 billion Chinese online media company is down 26.5% over the last 12 months and trades at 14.5 times trailing earnings. The number of internet users passed 500 million last year driving gains for online providers like Sohu, though roughly 60% of the population remains offline.
Petroleo Brasileiro Petrobras (PBR) is expected to report a gain of $0.94 per share, an increase of 4.4% over the same quarter last year. The Brazilian integrated oil & gas company has seen its shares rise by 24.8% since the beginning of the year after a steep selloff from last year's highs. The company has recently come under pressure from regulators over a spill at the Santos Basin off the country's coast.
Investors focused on the long-term, or those with a strict dollar cost average schedule may still find the market relatively attractive. Valuations are not so high as to merit a large cash or fixed-income position. Traders or those worried about short-term losses may want to hedge their bets with options or with positions in the volatility index.
The Vix (VIX) fell 4.8% to 17.11 on Friday, its lowest level since last July as the market welcomed the strong jobs report. Profit-taking or any weakness out of China or Europe this week could push markets down and lead to a surge in the index. Investors can buy call options on the index to hedge against possible losses in the rest of their portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.