The January employment report released Friday by the Labor Department indicates the U.S. economy is teetering on the edge of recession. Assuming this data does not get revised upward in the months ahead, the economy lost jobs in January (-17,000) for the first time since August 2003. Employment had been one of the few remaining areas of strength, so this deterioration underscores our cautious approach to the markets early in 2008.
Curiously, stock prices continued to advance following Friday’s employment report. In fact, the S&P 500 posted its best weekly gain in almost five years, rallying nearly 10% from the January low in only eight days. We believe much of the rally was driven by short-covering, not a sign that the bull market has regained traction. As a result, we took the opportunity to reduce equity exposure across our models by 5% as we believe the market is at risk of eventually revisiting the January lows.
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