How Unemployment Numbers Will Impact The Stock Market

| January 9, 2009 | 0 Comments

The second I stepped into my car I knew today would be interesting.  On my daily commute, I always tune my radio to the Financial News Network.  It’s an all business/all news radio program.  I guess studying the market ten to twelve hours a day isn’t enough for me.  I’ve got to listen to market commentary on the drive to and from the office… and read about it on weekends.

But I digress.

I listened intently to the radio on my drive in.  The Labor Department released the nation’s jobless numbers.  In a normal economy, the jobless number is looked at then quickly forgotten.  Often it’s just one of thousand of indicators.  Indicators used by economists to measure the health and growth of the economy.

In a recession the jobless number takes on a huge level of importance.

See, in a recession the jobless number can be a leading indicator of a lot of things.  One is consumer confidence.  Watching co-workers lose their jobs isn’t a comforting feeling.  Your own job security is threatened.

And that means you’re less likely to spend money…. And less consumer spending hurts the economy.

Jobless numbers also signal expectations of employers.  I know from working in a number of high growth industries, employees are often stretched to the breaking point.  Only then are new employees added. Clearly, the desire to maximize employee productivity is very high in the US.

Once jobless numbers start stabilizing, or shrinking, it’s a sign the economic engine is running again.  It’s a great indicator for how businesses of all sizes see the economy in the next few months.

So enough about jobless numbers.  What’s it all mean?

Well, here are the numbers.  The Labor Department announced record unemployment of 7.2% (up from 4.6% in 2007).  That’s the highest level seen in more than 16 years.  Last quarter, more than half a million people lost jobs.

In all of 2008, 2.6 million jobs were lost… the most since 1945.

Folks, these are historic numbers… and they show that the recession is much worse than many were expecting.

But like anything, beauty is in the eye of the beholder.  And market expectations mean everything.

Believe it or not, the market was expecting higher job loss numbers.
In November and December everyone underestimated the number of lost jobs.  It’s an interesting sign.  It might mean employers were quick to cut back with the weakening economy, and now are being more selective of job cuts.  It could also signal a seasonal slowdown in unemployment (it’s hard to fire people during the holidays).

It’s the market that matters.

Put all your expectations aside.  The true key to this unemployment puzzle is how the market reacts… and it’s not good.  The market’s down (and down big) on the news.  That tells me the jobless number is a focal point for the recession… and the expectations are for a struggling economy.

Remember it’s one piece of a thousand piece puzzle.

I’m watching a number of other things.  Top of my list are earnings. Earnings this quarter, and the market’s reaction will tell us a lot about the future market direction.  Bad earnings news, and more moves lower point to a prolonged recession.

I’m also watching the technical indicators closely.  Like the 200-day moving average.

If you remember, back in early 2008 the 200-day moving average turned lower.  That was our signal to get out of the market.  In the next few weeks this indicator will be important to watch.  If it continues lower, we can expect a few more quarters of a recession (and a much lower market).

For now, continue to monitor your core positions closely.  And don’t be afraid to continue hedging your portfolio.

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Category: Bonds

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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