Analysis: A strong week for stocks, but why?

www.naplesnews.com Monday, January 13, 2003 By NEAL LIPSCHUTZ, Dow Jones Newswires

NEW YORK — Pardon this party pooper, but it seems particularly odd that U.S. equity markets finished slightly higher Friday to close off a pretty strong week.

After all, didn't we on Friday get a surprisingly downbeat report on the economy that said about 100,000 jobs were eliminated in December? That figure came in the face of forecasts for a 30,000 job increase. That figure, combined with a revised November jobs number, now means nearly 200,000 jobs fled the scene in the final two months of 2002.

Oh sure, you can talk about seasonal factors and how it affects retail hiring, which was probably soft this year in line with the prescient caution store owners showed given the sluggish holiday shopping season.

You can say there's problems with the numbers because of those seasonal adjustments. The fact is the government data are all we have to work with, imperfect as those figures are. And 200,000 jobs gone in two months is not usually good news for stock market bulls.

Optimism is always a good thing. But it would be a bit more reassuring if there was more tactile support for the buoyancy in spirits of investors this time around. Yes, the President did introduce a tax-cutting package this week that if enacted would, among other things, eliminate investor taxes on dividends. If enacted and over the long run, that should improve interest in the purchase of equities and is therefore bullish.

If enacted and over the long run are the operative phrases of the prior sentence. The tax cut plan, news reports aver, has a tough fight ahead in Congress. Meanwhile, many pundits doubt the near-term stimulating impact of the proposed stimulus plan.

Nothing has brightened on the geopolitical front, the dangers of which have been widely heralded as the cause for the overwhelming caution in the economy and the extended soft spot we are now experiencing.

The hostile words and nuclear worries surrounding North Korea, if anything, grew more ominous.

Nothing happened this week that makes war with Iraq less likely. Any conflict, of course, beyond the real human costs, also opens up endless possibilities for economic problems.

And there's more than Iraq to worry about if you are focusing on oil. Venezuela remains in an apparent twilight zone-style standoff between supporters and opponents of its president. The general strike there is reportedly still pretty much in place and the nation's oil production is way down.

Yes, members of the Organization of Petroleum Exporting Countries have said they will supply more oil and they meet this weekend in Vienna to discuss that issue. But OPEC ultimately works for its own interests, not those of oil consumers, even if it sometimes views those interests over a longer time frame.

Meanwhile, earnings reports for the fourth quarter are about to flood in from U.S. companies. Everyone knows the fourth quarter was weak, so will weak earnings be dismissed by optimistic stock investors as they are reported?

Maybe. There will be a lot of focus, as always, on what companies say about the current quarter, since the future is always more interesting and speculative than the past.

Employment, geopolitics and oil prices are all important. But in the end, its earnings growth that drives stock prices.

So maybe, given the healthy gains in share prices this week, investors are telling us that those earnings are finally about to turn around, if not in the current quarter, than in the next quarter.

Optimism is always a good thing. But it would be a bit more reassuring if there was more tactile support for the buoyancy in spirits of investors this time around.

Neal Lipschutz is senior editor, Americas, Dow Jones Newswires.