The rally has picked up speed as the day has worn on, with the S&P 500 up 1.2% heading into the final hour of trading on Wall Street, trading near the high of the day.
This is a very encouraging sign for sentiment, given how weak the employment data was earlier. Some commentators are downplaying the data, saying weather was partly to blame and it wasn’t all that bad, but I’d disagree. Whichever way you slice it, it was a very weak report.
When no analyst was predicting payroll growth as low as 113,000 and the median estimate was about 60% higher, you have to say it was woeful. The recovery in US employment was going just fine up to November, but with two very soft months in a row, there has to be some concern about whether we are seeing a change in the trend. December’s weakness looks even starker now, given a sizeable upward revision to November and a meagre revision to December.
Private payroll growth of 142,000 in January also hugely undershot expectations. Yes, there was bad weather in December and January, but isn’t that always the case at this time of year?
I think today’s rally may be more to do with the quality of earnings than anything else.
We’re deep enough into earnings season to be able to make with reasonable confidence some calls as to the overall character of how US companies performed last quarter. Basically, it’s good news, with earnings on course for growth of 9% or so and three quarters of the companies in the S&P that have reported so far beating expectations with their earnings. The top line isn’t as strong, which has been a familiar refrain for several quarters, but if companies are able to keep growing earnings at these rates they become attractive at current valuations.
Looking ahead to next week, the first look at consumer sentiment for February (released next Friday) is one of the more interesting events in the calendar, alongside Janet Yellen’s first monetary policy testimony before House Financial Services Committee in Washington (next Tuesday).