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On Friday, January 31, the S&P 500 Index fell 1.77% resulting in the year to date return for the month of January equaling a negative .16%. That Friday decline meant the Index's return was down 3.22% from the year's high. One common phrase that describes investor behavior of late is "buy the dip." Last week's market action, up four days in a row until Friday's decline, is evidence that this "buy the dip" mentality remains a characteristic of the current bull market.

In our firm's view the positive market action is occurring in an environment where economic activity is improving. A few of my earlier posts noted the improving manufacturing picture in spite of the ISM Purchasing Manager Index for manufacturing earlier falling below 50%, a sign of manufacturing contraction. This past week's report on the January ISM Manufacturing PMI surprised to the upside by 2.4 percentage points at 50.9% though, i.e., an expanding manufacturing sector. Markit's report on PMI's tends to be targeted more closely to specific regions and the below chart shows manufacturing PMI's in expansion territory around the globe. Markit's U.S. PMI never fell below 50 in the recent slowdown.

In another positive report this past week, weekly jobless claims were reported at 202,000 beating the consensus expectation of 215,000. The four week moving average is showing improvement as well.

Job market strength was also confirmed in the Employment Situation report Friday. Nonfarm payrolls rose by 225,000 and exceeded consensus by 65,000. From a cautionary perspective, the 65,000 upside surprise does fall within the plus or minus 110,000 90-percent confidence interval. Notable in the report is the continuing increase in the participation rate reported at 63.4%. This is up from 62.4% in September 2015.

The below chart normalizes the participation rates to early 2008 for the noted age groups. The 55 Years & Over group has mostly remained above the financial crisis level since 2008. Importantly, the 25 to 34 Years age group finally surpassed the 2008 level, with the other three groups fast approaching their 2008 levels. In short, the job market data certainly suggests the labor market remains strong.

There is much to like about the U.S economy and stock market action seems to be confirming this. Corporate earnings are favorable and double digit growth or near double digit growth seems likely into 2021. Also favorable for stocks is the fact the earnings growth rate is increasing or accelerating. As stocks tend to trade on forward earnings, the increasing growth rate of earnings is not going unnoticed by the market.

Finally, the market is not inexpensive on a P/E basis, but given the lower level of interest rates, a higher market valuation is not unexpected. A near term market consolidation would be healthy and expected, yet would set up the market for a favorable return for the balance of the year.

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