Dion Money Management Blog   Money Management for Retirees and Their Families

The Dow Jones Industrial Average completed its roundtrip to the 10,000 level this week after posting its largest one-day gain since August 21. The rally that began in March has been swifter and steadier than most would have expected given the threats to the banking industry and the credit markets. Although valuation becomes trickier at these heights, the economy continues to make steady progress in manufacturing, sales, and employment.

This week both the New York and Philadelphia manufacturing surveys reported increases in overall activity. This was the third straight month that these surveys indicated headline growth. The details of the New York report were particularly strong, including its employment index. The question remains the extent to which activity is driven by the rebuilding of depleted inventories or sustainable demand. Even inventory replenishment, however, can be an essential component of aggregate demand at key cyclical turning points such as this.

Although employment continues to contract, the pace is slowing, exhibiting a fading of weakness, so to speak. The four-week average of new unemployment claims stands at approximately 532,000, which is down nearly seven percent from one month prior. Unfortunately, this means that unemployment will continue to rise in the near to immediate term.

But as we have seen so far this year, rising unemployment does not necessarily impede the ability of stocks to advance. In fact, during the previous five recessions, the stock market appreciated 29 percent on average before unemployment peaked, according to UBS Global Equity Research. Moreover, the advance has typically continued over the following six months, recording another 4.6 percent gain on average. The tendency for employment to lag in spite of economic stability—a so-called jobless recovery—is a relatively new phenomenon, occurring in the past two recessions.

A primary force behind the stock market’s resurgence has been the improving picture of corporate earnings. More than 70 percent of companies reporting results thus far have beaten their consensus estimates. Although year-over-year revenue comparisons are down, there is sequential growth from last quarter. Sectors with the biggest improvements over the past month include financials, materials, and technology. Tech companies are reporting improvements from industrial demand, such as companies exposed to the automotive sector, which is why I continue to advocate a small overweight to Fidelity Select Automotive (FSAVX).