Smart Investing Daily – Anticipate a Weaker-Than-Expected Jobs Report

Jared Levy, Editor, Smart Investing Daily
Thursday, 05 May 2011
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job marketRecently the financial stock market has been slow to react to anything. Events and data that would normally get a big reaction from the markets have had minimal effect. Even the killing of the most wanted man on Earth did little to influence U.S. stocks.

That calm trend may be about to change…

What News Matters for the Financial Stock Market?

All news, economic data and corporate announcements such as earnings reports have some influence on the financial stock market. A successful investor forms opinions about the economy and the companies he or she invests in based on all kinds of news. But an investor also needs to be aware of what news the financial stock market uses.

Think of the market as a telescope looking ahead about four to 12 months. Because of this “forward view,” we use the market as a leading indicator of strength of the economy.

Even though the stock market looks forward, there are checkpoints to make sure it is not getting ahead of itself or that it has gone far enough! The checkpoints are news reports and economic data. If these are not meeting expectations, the markets can correct.

Different news matters at different times. But one major checkpoint may need to really step up the pace, if the financial stock market is going to continue higher.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market for you with our easy-to-understand investment articles.)

The Employment Situation

The unemployment rate, though important, is considered a lagging indicator of economic health. This means that the economy could be improving and the unemployment rate might be slow to respond.

Remember earlier I mentioned that the financial stock market is like a telescope? Well, you can also think of it as a rubber band. When the market moves higher and economic conditions improve, the tension on the band decreases. But when the market has been moving higher and the economy doesn’t improve fast enough, the tension increases. Too much tension and a snap-back will happen. That is not good for investors.

The jobs report, which contains the unemployment rate, is released on the first Friday of every month. It is closely watched…

The rate at which we add jobs in this country is being scrutinized more and more and is becoming a major source of tension in the markets. Traders are starting to be concerned.

The unemployment rate is at 8.8%, according to the Bureau of Labor Statistics.

Expectations are for the unemployment rate to stay at 8.8% for April, but analysts are also looking for 185,000 jobs to be added. (I know these unemployment numbers can be misleading and confusing. If you are wondering how jobs can be created and the unemployment rate can stay the same, read this Smart Investing Daily.)

The bottom line is, I don’t think the economy created 185,000 jobs last month. I think the number will be much lower, perhaps below 150,000. Here’s why:

1. Unemployment claims have been on the rise.

If you look at the chart below, you can see that new unemployment applications have actually been on the rise. The numbers have been coming in higher than expected and the revisions have been worse on average. This paints a grim picture for the jobs number Friday.

Unemployment claims since Feb. 10
Unemployment Chart
View larger chart

2. ADP report was worse than expected.

ADP is the nation’s largest payroll company. It offers its employment data on the first Wednesday of every month to help investors get an idea of the market climate. Anyone who is familiar with the unemployment situation knows that the ADP report isn’t the best gauge of the actual jobs number; one could say that it tends to be more “optimistic” than the actual data from the BLS.

If that optimism were based on facts, we should have had a decent report last month. Unfortunately, the ADP jobs report came in far less than expected (see the second chart below). This is not what you should see if the economy is growing.

Monthly jobs added – BLS
Jobs Chart
View larger chart

Monthly jobs added – ADP
Unemployment Chart
View larger chart

What Will Happen?

Well, expect a bad number. Based on the research I have done, the economy will add far fewer jobs than expected. The market will likely sell off on the news.

But you should then keep an eye on how the government reacts. With market movement, it is not just about this report. A jobs market that remains weak will provide an excuse for our friends at the Fed and in Washington to keep printing money. People without jobs can’t really spend extra money. So according to Bernanke, because people can’t buy things, consumer prices (inflation) won’t rise.

And since Bernanke still thinks inflation will be short-lived and doesn’t seem to care about the spending power of the average American, the weak dollar policy will continue. As illogical as it is, markets will continue to rally.

As much as jobs matter to most of us, the stock market likes some unemployment. The market will most likely get its wish tomorrow — a reason to climb.

Editor’s Note: Agricultural commodities are about to explode in price, sending food prices soaring. That’s bad for restaurants and consumers… but it’s great for farmers and commodity investors.

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