Is Unemployment Good For The Stock Market?

| December 9, 2010 | 0 Comments

I’m sure you’ve heard by now, the latest jobs report came out a few days ago.  Yuck!  Needless to say, it wasn’t pretty.

Just last week I wrote how many economic indicators are clearly pointing towards a recovery.  And then this happens…

In case you didn’t see it, here’s a quick recap…

The economy only added 39,000 jobs in November.  The experts were expecting an addition of 150,000 jobs.  That’s quite the difference… and extremely disappointing after jobless claims dropped so much in the previous week.

What’s more, the unemployment rate ticked back up to 9.8% after dropping to 9.6% in October.  It’s bad enough to see the unemployment rate tick higher… it’s even worse when it was expected to stay flat or even drop.

In a nutshell, the report was full of bad news… and most of it was a surprise to the experts.

The one silver lining was the upward revision in jobs in past reports.  Between September and October, the economy generated 38,000 more jobs than previously reported.  Hey… it’s better than nothing.

So is it time to panic?  Was all the good news the last couple weeks just a head fake?

Fortunately, there’s a lot more to this story than just the numbers.  The bulls shouldn’t leave the party just yet.  In fact, we’re just getting warmed up.

Here’s the thing…

The negative jobs report is actually bullish for the markets.

First off, the jobs report can be viewed as very positive for companies.  It actually could be showing strength in the corporate world.  It may seem counterintuitive, but here’s the deal…

A lack of hiring or hiring at a slow pace means companies are keeping a close eye on their margins.  Management is focusing on maximizing operational efficiencies.  And come earnings time, profits should be very strong.

Of course, strong profits usually mean higher stock prices.

And that’s not all…

With the economy ailing, any negative economic news adds to the possibility of further fiscal or monetary stimulus.  We’ve already seen an extension to the Bush tax cuts.  And Bernanke even mentioned QE3 as a possibility.

The government is doing everything in its power to stave off a prolonged recession.  What’s more, they’ll continue to do so as long as the economic outlook looks grim.

The equity markets love it.

Low interest rates and higher liquidity is a big positive for the vast majority of companies out there.  As long as we keep hearing about or seeing stimulus measures, there’s a good chance equity prices will climb.

Finally, many investors aren’t buying the job reports.  Much of the recent economic data has been positive.  (Except for housing – the housing market still has a ways to go.)  There’s a growing belief the November jobs report is simply an anomaly.

I’m not totally sold on the jobs report being a complete outlier.  However, you can’t deny the flow of good news we’ve been seeing.  GDP, retail spending, and consumer confidence have all increased in recent weeks.

It’s not a coincidence.  There’s definitely some economic improvement in the works.

But here’s the interesting thing… it doesn’t really matter to the markets.

The bottom line is bulls are in good shape either way!

If good economic news comes out, the market goes up.  Most companies are obviously better off in a thriving economy.  On the other hand, if bad economic news comes out, the market goes up!  Low interest rates, low taxes, additional liquidity, and the possibility of QE3… companies love that stuff.

Let’s face it… now’s a great time to be a bull.

The job market may not be recovering at the pace we’re hoping for.  But, companies are using the slow economy to right the ship.  With accommodating government policy and a strong corporate profit outlook, the stock market actually is in pretty good shape.  So, don’t let the sour jobs report keep you on the sidelines.

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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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