Oppenheimer Asset Management, Inc.

Stock markets generally had a good week last week. US equities were up for the first time this year, with the Dow higher by 3.5%, the S&P 5.2% and Nasdaq 7.8%. Europe was higher by about 4%, and Asia was flat. The 10-year Treasury sold off again and now is only a tick short of 3%. Munis rallied modestly.

Of course, one reason for the surprise at the equity gains was the end-of-week release of the employment data in the US. Almost 600,000 jobs were lost in January, and the unemployment rate jumped to 7.6% from 7.2% in December. Initial claims climbed over 600,000 in the week ended January 31. The only positive in the release was that average hourly earnings rose 3.9% YOY, about the same as in the previous month. Recall that unemployment is a lagging indicator of economic activity.

The other news in the week indicated that the recession is still virulent. However, one thing the markets have historically always looked for is a slowing in the rate of descent, and there was some evidence of that in last week’s data. The ISM manufacturing survey indicated that the sector continued to decline in January but it did so at a lesser rate. The ISM nonmanufacturing sector, a representation of the biggest part of the economy, also continued to slide downward but it too did so at a slower pace.

The ICSC retail sales numbers for January continued to show a decline YOY, whether in total sales or in same store sales, but those sales numbers showed a fall by less than in the previous month. January US auto sales, however, did have their worst month since 1981. New orders for December registered a 3.9% drop versus 6.5% the month before, and non defense capital goods shipments ex aircraft were actually up modestly in the same month. Productivity in the fourth quarter of 2008 increased at more than double the third quarter pace, and unit labor costs gains slowed. Both these data points should be an indicator of at least a stabilization of profit margins. Prices did fall slightly, however, eroding some of the impact of the productivity improvement.

On the housing front, there were some positives. Pending home sales rose 6.3% in December as home prices and interest rates softened. While a volatile series, mortgage applications advanced by 8.6% in the week ended January 30.

So, despite the continued outpouring of bad news and sustained high levels of anxiety about where we go from here, we believe now it is evident that the rate of decline in the US economy has slowed. The same is true for Europe although not for Japan. This does not mean that the that the recession is over, much less that the end is even in sight. It just indicates that on the basis of what we could be nearing a bottom. A new fiscal stimulus package, if properly designed might help to speed the end of the slide. Unemployment will almost certainly continue to rise, but again it is important to remember that this is a lagging indicator.

No one knows how to predict the stock market with any certainty, but if history is any guide, and if the slowing in the rate of descent continues, we believe there is a heightened possibility that we will begin to see a better tone to the markets. Good weeks could begin to outnumber bad ones, again if history is any guide and the economic situation has in fact stopped worsening at the torrid pace of the last months of 2008.