The US Employment Report capped a week of positive economic news for the U.S. recovery. Elsewhere the releases were mixed, but central bankers across the globe maintained their easing monetary policy stances. All of that was sufficient to raise equity prices to new record levels. Government bond yields rose — a confirming and more reliable indication of economic recovery. The U.S. dollar and commodity prices also increased on the week.

Perspective:

Human nature is a difficult force to overcome in making our personal investment decisions. Investment decisions are decisions based on expectations for the future, balancing risks and rewards, and reaching for some future goal. The economic decisions to invest are ones that involve putting off current spending for the ability to spend in the future.

How does human nature come into the picture? Our spending habits wait for items to be on sale or prices to be low. Yet, our instincts and interest in investing rises when prices reach new highs. I don't have a logical explanation for that part of human nature, but I have observed both friend and media interest in the stock market rise, as it did this week, when we reach new highs. This week many of my friends are asking what I think of the market now that index levels have reached new highs.

First, to clarify where I am coming from, my view of stocks is fundamental, not technical, meaning I care about earnings that support stock prices, not head and shoulder patterns on stock charts or 200-day moving averages. I don't care about 14,000 on the Dow Jones Industrial Index; the DJ is calculated by adding up the stock prices of one share of each of the 30 stocks and dividing it by a factor. To me 14,000 is no different from 14,001 or 13,999. A price level needs to have a basis; for me, that basis is fundamental.

So, how do I look at Price to Earnings ratios? As reported in www.multipl.com, the P/E ratio using the trailing 12 months of reported earnings was 17.93 for the close on Friday. Going back to 1871 that ratio has ranged from 5.31 (December 1917) to 123.79 (May 2009). The median P/E ratio was 14.50 and the mean ratio was 15.59. The Wall Street Journal reported that the P/E ratio using the trailing 12 months was 18.15, presumably using a similar methodology. In either case the market selling at 18 times past 12 months earnings, is not undervalued and may be slightly overvalued.

Yet investment decisions should be forward, not backward looking. Therefore, shouldn't we be looking that way when calculating P/E ratios? Birinyi Associates produces an estimate using operating, not reported, forward 12 months earnings. Based on their earnings estimates, the S&P 500 is now priced at 13.85 times forward earnings. The ISI group projects $108 2013 earnings for the S&P 500, which would price the Friday close at 14.36 times the ISI projected 2013 earnings. Those estimated P/E ratios would suggest that if earning projections are met and the stock prices are unchanged for the year, at year-end the S&P 500 would be selling at about 14 times its trailing earnings. For me, the U.S. stock market is certainly fully priced, but not irrationally exuberant on a P/E ratio basis.

Economic Releases:

The February U.S. Employment Report portrayed the firming of jobs in the recovery. Non-farm payrolls (blue in the chart) increased 236,000 — above the range of expectations. Partially offsetting some of the good news, revisions for the past two months reduced previous reports by minus 15,000. Private Payrolls (red in the chart) increased 246,000 so government payrolls declined by minus 10,000. Manufacturing payrolls (green in the chart) increased 14,000. The increases were broad by industry and pay categories; high end jobs were created.

In other U.S. employment news, the unemployment rate dropped two ticks to 7.7%, but some of those gains were brought about by a decline in the work force. The Average Hourly Earnings rose +0.2%; the Average Workweek rose a tick to 34.5 hours. In the week of March 2, Initial Jobless Claims fell to 340,000; the four-week moving average fell to 348,750, the lowest level since March 2008. The four-week average of Continuing Claims fell to a post-recession low of 3.122 million.

The Purchasing Managers' Indices increased in February, well into the expansion zone. February's ISM Services (ie: non-manufacturing) Index (red in the chart) rose to 56.0; the ISM Manufacturing Index rose to 54.2.

Other Economic Releases

U.S. Factory Orders fell minus 2.0% in January and the December orders were revised lower to 1.3%.

Central Bankers met this week and maintained their easing stances. The European Central Bank met and maintained their interest rates at 0.75% despite expectations for a quarter-point cut. The Bank of England met and maintained interest rates at 0.50% and Asset Purchases at 375 billion pounds. The Royal Bank of Australia met and made no changes in its rate at 3.00%. The Bank of Canada met and kept rates unchanged at 1.00%. The Bank of Japan left rates unchanged at 0.10%; the BOJ noted that its economy was bottoming out.

The EU reported that its fourth quarter GDP was unrevised at minus 0.6%. EU Retail Sales rose 1.2% in January. German Industrial Production was flat and Manufacturing Orders fell minus 1.9% in January. French Unemployment rose to 10.2% in the fourth quarter of 2012. The UK CIPS/PMI rose to 51.8 in February. The Canadian Ivey PMI fell to 51.6, but remained in the expansion zone.

China's January-February Industrial Production rose 0.79% and January-February Retail Sales rose 0.99%. Japan's fourth quarter GPD was flat, but rose 0.2% SAAR and 0.4% YOY.

Equities Markets:

Equity markets rose to new record levels this week on the heels of stronger economic data (in the U.S.) and continued easing commitments from Central Banks. The ML Bond Indices report (see chart) on a one-day lag and were prior to the U.S. Employment report, which caused yields to rise and bond prices to decline; those ML indices would report lower returns through Friday than their Thursday values listed in the chart.

Bond Markets:

Government bond yields rose significantly across the globe. In contrast, credit spreads declined. Note that ML credit spreads are reported on a one-day lag so they were spreads prior to the U.S. Employment report.

Currencies & Commodities:

The U.S. dollar rose against the other four currencies (see chart). Commodity prices rose on the week.

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Who is John Davidson?

John W. Davidson, CFA, started writing these Comments over a decade ago as a personal discipline when he was promoted to chief investment officer from portfolio manager.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income, and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he has appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services often quote his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and courses at the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a Naval Officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserves, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is treasurer of the Maine Conference of the United Church of Christ, serving on the executive committee and the coordinating council, the governing board of the conference. He is also on the investment committee of the Pen Bay Health Foundation.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.