MARKET

It was a very strong week in the equity markets as the overall US stock market (VTI) increased 2.99%, the SP500 (SPY) was up 2.74%, international markets (VXUS) flew higher by 6.03% and the aggregate bond index fell 0.33%.
On a daily basis, the trend is no longer down. The market has put in higher highs and higher lows. Bears still argue this is simply a bull run inside of bear market. They may be right, time will tell. It is not unusual for strong rallies inside of a bear market. But our belief is that for a bear market to take hold, the US economy would have to spin into recession. And the last few weeks, while mixed, the thrust of the economic data has been indicating that the US will avoid recession for now. This is confirmed by the latest GDPNow estimate of Q1 real GDP growth, which moved up to 2.2% from 1.9% last week.

EMPLOYMENT

Non-farm payroll had another strong report, rising 242,000 in February. The prior two months were revised higher by 30,000. The unemployment rate remained steady at 4.9%. The average work week fell by 0.2 hours and average hourly earnings dropped by 0.1%.

Initial claims for unemployment rose by 6,000 to 278,000. The four-week average dropped by 1,750 to 270,250.

Overall the employment reports are positive and show strength in the US economy.

PRODUCTIVITY

Productivity of nonfarm workers fell at a 2.2% seasonally adjusted rate in Q4 of 2015. It was the weakest report since Q4 of 2014. This was not a good number. Only four times since 1994 have there been weaker quarters. Lower productivity coupled with higher wages increases unit labor costs, and at some point, higher unit labor costs will encourage businesses to find ways to reduce those costs. In other words, cut employment or slow its growth.

MANUFACTURING

Factory orders were up 1.6% in January, a seven month high. The ISM Manufacturing report came in at 49.5. A reading of 50 is considered break-even, so 49.5 would indicate a small decline in activity, but that number is better than recent reports and was better than the consensus estimate of 48.5. It is the second straight month with a higher reading (month over month). Recent reports like this might be indicating that the manufacturing sector has stabilized.

NONMANUFACTURING

The ISM gauge of nonmanufacturing businesses fell to 53.4 in February from 53.5 in January. That is the lowest level in two years but still a healthy amount above the break-even level of 50. The reading indicates the US economy continues to expand.

CREDIT QUALITY

Moody’s Investor Service monthly tall of the least creditworthy companies (ie junk ratings with a negative outlook) rose to 274. The all-time high was 291 in April of 2009.