The Only Data Point That Matters

 | Jan 02, 2014 | 7:56 AM EST
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Take a look at what worked in the fourth quarter. If you do, you can see why I write -- right up top in Get Rich Carefully, that the only economic metric worth following is the payroll employment number that comes out on the first Friday of every month.

First, let me say: We are bombarded with numbers. We have all sorts of them -- purchasing managers reports; retail sales; new and used home sales; durable goods; consumer confidence; inflation, both producer and consumer; Federal Reserve minutes; and the index of home pricing.

I don't want to say, "Throw these away, they mean nothing." They can impact the pricing in U.S. Treasury bonds, at least ephemerally. They must be reported because they are, indeed, news. But for the most part they have no lasting impact, almost none whatsoever, at least when compared with that payroll report. This was the number that predicted the downturn, and it was the number that led to a wholesale shift in stock focus -- the big rotation -- in the fourth quarter. This was vital when it came to picking the right stocks that outperformed, and outperformed substantially, in the latter half of the year.

I know that might seem unfair to those who make a big deal of every number, but let's look at what happened in the fourth quarter.

First, as soon as the first good number showed up, investors started dumping everything that was soft goods or recession-related, including General Mills (GIS), Kellogg (K), Eli Lilly (LLY), Pfizer (PFE) and Johnson & Johnson (JNJ). It was almost as if these stocks caught the plague. If you had stayed with them or hadn't cut them back because you had wanted to be diversified -- something I wouldn't have blamed you one bit for -- your portfolio would have stopped increasing in value. It would have just hit a wall.

It is important to recognize that the same idea generally applied to the drugmakers. Unless there was a new breakthrough drug or approval -- as was the case with Gilead (GILD) and its hepatitis C drug, newly sanctioned by the Food and Drug Administration -- the same underperformance struck hard there, too after the big employment number. It just stopped this once-red-hot group in its tracks.

Now, let's compare a couple of the industrials. First, take 3M (MMM), one of my absolute favorite industrials. Despite some vicious downgrades, including an outright sale at one important firm, this stock just wouldn't quit. When it was hammered by the downgrade, many wrote it off, but it could not be kept down as more excellent employment numbers hit the tape that showed real job growth.

Or consider Union Pacific (UNP). Here's a company warned about a shortfall, which drove the stock down momentarily -- and then it had a sustained advance, just as in its sister stock, Norfolk Southern (NSC). It wasn't just the trains, either. Despite endless and worthless, I might add, valuation downgrades of FedEx (FDX), the stock wouldn't quit.

But perhaps the most glaring outperformance of all was found in the machinery and mining stocks stocks, led by Cummins (CMI), Caterpillar (CAT) and Alcoa (AA).

Cummins issued horrendous guidance when it reported but, then, because of robust jobs growth in the U.S., the stock roared ahead -- above the level where management had issued a pre-earnings warning. Caterpillar's sad management team couldn't execute on its sound worldview and cut guidance drastically, but the stock rallied anyway. As I point out in Get Rich Carefully, this kind of action means a bottoms is in place. The only news on Alcoa has been what would turn out to be an outrageously stupid downgrade by Deutsche Bank: The stock took off, again, not because of inventories or order books but because of the economic expansion that the employment number foretold.

The pattern is clear. The employment number is the number. If history is right, if the next employment number is strong this outperformance will simply be reinforced, regardless of other concerns. That's what I would bank on.

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