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Local Voices

The Stock Market and the January Jobs Report

On Wednesday last week (February 5th 2014), Jeff Reeves declared in his article “This one job report will make or break the year” that “[i]f ever there was a report that could make or break a market, it is Friday’s update on January job creation…” He explained that although a robust job market is not a requirement for a stock market rally, in order to build significant gains, investor confidence is still important. “The direction of American hiring trends are a crucial indicator of economic recovery and consumer spending, and therefore important to investors in any market…the added pressure of uncertainty and recent confusion over economic trends makes this a make-it-or-break-it report,” wrote Reeves. He went on to say that “one of two things are true: Either this report is an outlier, and we will see a snap back in January numbers and revisions that move December’s numbers higher... or January jobs numbers also miss, reinforcing macro fears and fuelling deeper declines in the market.”

When Thursday dawned, it saw the stock market rally. The Standard and Poor 500 index rose by 22 points, NASDAQ increased by 46 points, and the Dow Jones Industrial Average climbed 188 points. This encouraging performance came at the heels of the jobs market’s welcome news about the decline in the initial weekly unemployment claims. Showing a 20,000 reduction, the unemployment claims fell from last week’s 351,000 to this week’s 331,000.

According to an article by Sam Ro of Business Insider, Ian Shepherdson of Pantheon Macroeconomics had this to say about the matter: “After last week’s unexpected spike, this is something of a relief, though the latest bout of severe weather could easily push claims back up again for a time. Still, claims have now been at or around the 330K mark in four of the past five weeks, so that seems to be as good an idea of the underlying trend as any.” This, according to Shepherdson, “means [that] claims are no lower now than at the end of last summer, before all the Q4 distortions. But the pace of hiring seems to have improved despite the layoffs, so the trend in payroll growth has nudged higher. We are hopeful that claims will trend lower over the course of H1, generating a further improvement in the job growth numbers.”

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Thursday saw both the S&P 500 and the Dow jump by 1.2 %, showing the biggest gains the two indexes has experienced so far this year. Nasdaq also performed well by rising 1.1 %.  Reeves had it right when he said that confidence is key. Richard Sichel, chief investment officer at Philadelphia Trust Co., echoes Reeves’ sentiment. He tells Bloomberg News in a telephone interview that “[t]he economy is showing somewhat steady improvement and earnings have been good…[t]he better economic reports are helpful, [since] it gives a little bit of a confidence booster.”

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Hibah Yousuf of CNNMoney reports that Thursday’s stocks benefited from the lower unemployment claims as “investors welcomed some good news about the jobs market ahead of the government’s all-important monthly employment report.” Chris Dietrich of The Wall Street Journal agrees, writing that, according to traders, the “report helped soothe some anxiety that has roiled stocks in recent weeks, and lifted optimism for Friday's closely watched January jobs report.” Dietrich adds that “[m]arket players attributed some of Thursday's rally to short-term traders repositioning ahead of the jobs report, cutting bearish positions in case the jobs number comes in better than expected.”

 

Now that Friday has come and gone, the numbers are in and the Bureau of Labor Statistics has yet again released another disappointing jobs report. Employers had added only 113,000 jobs in January, well below the 185,000 estimate that economists had predicted. According to Samantha Sharf of Forbes, “the S&P 500 and The Dow Jones Industrial Average both ping ponged in pre-market trading from down about .5% point to up as much as .5% [while] Nasdaq futures ticked up around .7%” in response to the report. “The light, but ultimately unimpressed, market response was echoed by several economists and investing professionals,” she adds.  

 

Annalyn Kurtz of CNNMoney writes that economists “called the report ‘disappointing’ and weak,’ but characterized broader economic growth as ‘steady-as-she-goes.’” She quotes Julia Coronado, chief economist of North America for BNP Paribas, who said that “[t]he U.S. economy is very stable…2014 might not be a breakout year, but it's not a disaster either."

 

Scott Brown, chief economist at Raymond James, tells Forbes over the phone that “[s]ome people are making a big deal about the slower pace over the last couple of months, but I think the season adjustment is really quite strong.” Sharf reports that Brown was unsurprised by the result because of the level of uncertainty leading up to the January report. Inclement winter weather, seasonal adjustments, benchmark revisions, and a methodology change surrounding elder care home workers were among the factors that contributed to the uncertainty.

 

The decline in the unemployment rate, from December’s 6.7% to January’s 6.6%, may trouble some investors as the Federal Reserve has used a 6.5% unemployment goal as a guide for tapering and loan rates. Eric Rosengren, Boston Fed President, said in a prepared speech Thursday that "[u]sing the narrow, widely reported unemployment rate alone could suggest a misleadingly optimistic state of affairs.” According to Kurtz, the Fed “has been stressing that its stimulus policies depend on the economic data, and while it has been aiming for an unemployment rate of 6.5%, it's expected to distance itself from using that number as its main measure of the job market.”




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