In the face of a string of troubling economic news, stocks enjoyed a strong rally last week in anticipation of the new Administration’s upcoming plan to address the financial crisis.  The NASDAQ led equity market performance with an 8% gain, with much of that earned following downbeat comments by Cisco Systems on Wednesday (Cisco finished the week up nearly 14%).  Meanwhile, Treasury bond prices continued to decline.  The 10 Year U.S. Treasury bond yield increased 14 basis points to 2.99%, up from 2.21% at the end of 2008.  As we’ve noted recently, this market action indicates some easing of the extreme risk aversion that has dominated the markets since September.

The major news of last week was the Labor Department report showing that January 2009 was the worst month of job destruction since December 1974.  Non-farm payrolls were cut by 598,000, and the November and December payroll estimates were revised downward by another 66,000.  Since the start of the recession, the economy has lost 3.6 million jobs, and half of those were lost in just the last three months.  The unemployment rate shot up from 7.2% in December to 7.6% in January.  Each of these figures was slightly worse than economists’ consensus forecast, but well within investors’ range of expectations, given the steady stream of layoff announcements over the past several weeks.

The market’s attention this week will be keenly focused on Washington efforts to address the financial crisis.  The Obama Administration used the dismal jobs report to demand approval of his $900 billion stimulus package.  Over the weekend, news emerged of a compromise plan in the Senate that slightly reduces the size of the plan, leading to an expected approval by narrow majority early this week.  But the main event occurs Tuesday morning as Treasury Secretary Tim Geithner unveils a restructuring of the bank bailout.  The plan is expected to include a new round of capital injections for banks, and an effort to help banks dispose of illiquid, toxic assets.

Most investors agree the stimulus plan won’t create enough new jobs as promised, and will simply add to the huge deficit.  Investors have high hopes that Geithner’s plan will be a complete, detailed package that will solve the crisis, which is unlikely.  Given last week’s strong rally, investors are likely to greet Washington’s latest efforts with skepticism.


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