Stock Market Precipitous Sell-off, Was the Jobs Report That Bad?

Stock-Markets / Stock Markets 2010 Jun 06, 2010 - 02:00 PM GMT

Best Financial Markets Analysis Article A precipitous sell-off in the stock market took place last Friday (Chart 1) as the Labor Department’s May monthly report showed that job growth was weak in the private sector. The NYSE had to invoke “Rule 48″ again, marking the fifth time this year it has used the rare rule, which is intended to help smooth the opening following volatile futures action.

So the employment report disappointed, but was it really as bad as evidenced by such a disproportionate selloff?

Market Mis-Expectation

The answer is no, it only failed relative to an incredibly optimistic benchmark set by some economists and the media, not to mention the Obama administration who mismanaged expectations.

The headline numbers for May do suggest reason for optimism — employers added 431,000 jobs and the jobless rate fell to 9.7%, from 9.9 % in April. However, the majority of focus is fixated on that almost all of the growth came from the 411,000 temporary workers hired by the Census Bureau, and the private sector created 41,000 positions, far short of the over-optimistic expectations for 150,000 to 180,000 jobs.

Hype & Over-Reaction

One needs to bear in mind that the big picture for the employment report should be based upon the following rationale: Are we better off in terms of job losses compared to a year ago, six months, three months, last month etc.? In other words, are we trending in the right direction, from 500,000 job losses each month to finally being net positive in job gains?

There is a tendency on Wall Street and the world in general to overreact to news events, and economic reports are not immune to this phenomenon. This kind of knee-jerk reaction to every micro bit of news is part and parcel of the sensationalistic news media model that has been employed to drive ratings and sell advertising space.

This often distorts the true significance of news events, and in the case of the latest jobs report, the underlying positive trend that is taking place in the employment environment.

If “Employment” Were A Stock

If one was trading this stock called ‘Employment’ and we graphed the year over year numbers on a chart it would appear quite bullish. (Chart 2)

In fact, this graphed line would be a trend trader`s dream stock to trade as we are in a marked uptrend which is steadily rising at a right angle, and will probably remain bullish, putting in higher highs and higher lows, for the next five years.

Big Picture - Trending Up

So the big picture of the employment trend needs to be the key takeaway from the latest jobs report, and not the extreme short-term reactionary view represented by Friday`s selloff in the market.

Eventually Corporations will start to feel more confident in the economic recovery to start putting those profits to work in pursuing new growth opportunities which require more risk.

And these new growth opportunities will require droves of new employees which will further reinforce the positively trending employment reports for the next five years, thus reducing another jobs figure some economists tend to focus on - the number of Americans out of work for 27 or more weeks--which remained at historical high.

Selloff = Bargains

With interest rate likely to remain zero for the rest of the year as one benefit for US investors due to another over-hyped news scenario in the European sovereign deficit scare, and speculations of stimulus 2.0, there are some real bargains in the market which will be snapped up ahead of the next earnings cycle as corporate productivity and profits are quite robust right now in the business cycle.

Overall, the labor market is trending in the positive direction. Smart investors would focus on the fact that the US economy is improving vs. three months ago, and take the recent selloff as bargain hunting opportunity, particularly in the resource sector, to enhance your portfolio.

Disclosure: No Positions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Comments

not recklessly optomistic
06 Jun 10, 19:50

really now?

the "recovery" is fueled by nothing more than

consumer's extra money from stopping their mortgage payments

consumer's extra money from extended unemployment bennefits

stimulus bill and fed 1.5 trillion purchases of bonds

high frequency trading desks and fed liquidity as well as accounting changes...propping up a stock market that has seen corporation's selling their own stock because they know just how bad things are.

now the first shot of opiates is wearirng off....the stimulus is wearing off and as the fog clears enough we could hear the rumbles of soverign debt defaults.....and speculating investment banks/ hedge funds are cashing in on rising CDS spreads.

the only question that remains as to where this casino will go next is how much extra cash do the big banks have to boost stocks up higher when they are saving a ton of it to make sure there capital ratio's will be in line when commercial real estate craps the bed in 2011-12-13

gAnton
06 Jun 10, 22:28

The End Game

It's obvious that much of the investment public is in denial. The end is clear and the jig is up--what isn't clear is the timing.

This so called current economic crisis "began" (i.e. "became apparent") approximately two years ago. The apparent basic cause was and is excessive debt, and the US and world debt is getting more out-of-hand every day. Things are much, much worse and unsustainable than they were two years ago, and we are continuing at an accelerating clip in a downward path to the final and inevitable destruction of our economy.

If the end is so clear, why is pronostication of the approximate end date so very difficult? I think that there are basically two reasons:

Firstly, it is an extremely complicated situation complete with innumerable number of astonishing surprises, and world governments are doing whatever they can to delay the inevitable.

Secondly, the only way of understanding the current complex situation is based on quantatative data, and much of the germane data is hidden, distorted, prefabricated, or misunderstood. Most of the government money has not been used to treat underlying economic problems--it has been used to obfuscate the true nature of the situation.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.