The markets started out September on a strong note. At the Friday close, the Dow gained 2.9%, the S&P 500 climbed 3.8%, and the Nasdaq rose 3.7%. Oil fell 0.76%, while gold is back up near its record highs. Following in gold’s footsteps, the new hot commodities, silver and copper, have also shown impressive gains this week.
Source: MSN Moneycentral
Before discussing the gains of this week, it is important to comment on the end of August last Tuesday. The monthly numbers were pretty awful, with the Dow off 4.3%. This marked the worst August in nine years. Investors have been scared by a month full of poor economic reports, so the drop is not all that unexpected.
In a complete reversal from that gloomy August, September 1st opened with a bang, as the Dow was up 2.5%. A morning report on manufacturing showed surprising strength, but that alone was not enough to push the markets that high. We believe a lot of big investors were making new positions for the month, which sent the markets higher. With the volume of trades as light as it has been, it is not difficult to push the markets with some big trades.
Continuing this good mood, the unemployment report came in much better than expected on Friday. The report showed a loss of 54,000 jobs, but the bulk of that was Census workers. Private sector jobs rose by 67,000. It does sound odd that Wall Street can be happy about more job losses, but the market had priced in large losses, which is why the market responded to the upside.
While the employment gains were impressive, we are not completely sold on the improving employment picture. This is primarily due to most of the job increases coming in the health and education sectors. These service sector jobs are hardly contributors to economic growth.
Also, the current 9.6% unemployment rate falls short of measuring the true unemployment for various reasons we won’t bore you with at this time. A better metric, underemployment, currently stands at 16.7%, up from 16.5% the previous month. Keep in mind, in order to keep up with the new entrants to the marketplace, hiring needs to grow by at least 100,000 per month. The employment picture may have improved last month, but we are not sold on this being the beginning of a long term trend.
Next Week
Even with Labor Day shortening the week, economic reports look light. There will be some corporate earnings releases from retail companies, however. We don’t see these as having much impact on the markets. All-in-all, it should be a quiet week for these macro factors.
Where are we investing now?
It will be interesting to see if the markets continue their climb from last week. If so, it could mark a new upward trend in the market. We still see poor economic conditions hampering the economy, so we remain cautious. The potential higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.
In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while
Commodities remain a longer term favorite, as inflation will also impact prices to the upside. Government policies will weaken the dollar over time, but it is currently benefiting from a flight to safety. Municipal bonds will play a more important role in our portfolios over the coming months and years as higher tax rates take effect. Finally, we are optimistic about international stocks, as emerging markets (excluding
