The day after April Fools Day was the most anticipated day of the month. It was on this fateful April 2nd that the Bureau of Labor Statistics (BLS) released the long-awaited unemployment numbers.
That very day, the U.S. equity markets (NYSEArca: IWV) were closed. Investors looking for an instant reaction had to look at the futures market or what stocks – developed markets (NYSEArca: EFA) and emerging markets (NYSEArca: EEM) – did abroad.
Even though some headlines blew the unemployment news out of proportion by exclaiming that “Employers added most jobs in 3 years,” others, such as the following, summed the picture up more realistically: “Jobs report: Not big numbers but … welcome numbers.”
For the third straight month, the seasonally adjusted U-3 unemployment numbers remained the same – 9.7%.
The Labor Department said employers added 162,000 jobs in March, the most since the recession began but below analyst’s expectations of 200,000. This number includes the 48,000 temporary workers hired for the U.S. Census.
According to estimates by ADP, a payroll company, the private sector lost 23,000 jobs in March. This estimate does not include government employees. Regardless of which numbers are correct, we have bigger fish to fry.
Bigger fish to fry
The U-3 unemployment figure of 9.7% is a palatable gauge of unemployment designed to make Wall Street happy, or so you would think. Looking at the U-3 numbers it becomes obvious that the real bull market is not in equities, but in unemployment (see chart below).
However, the real unemployment rate, even by the standards of the Bureau of Labor Statistics, is much higher. The U-6 unemployment number, as the real data is called, is at 17.5%, within 0.5% of its all-time high. This figure includes discouraged workers who’ve stopped looking, marginally attached workers, and workers that are forced to work part-time because full-time jobs are not available.
Taking off the rose-colored glasses
The post 2007 recession has eliminated 8.4 million jobs and rendered 15.7 million American’s jobless.
The mere fact that the palatable version of the unemployment rate has remained at 9.7% for three straight months, has Wall Street cheering.
Before chiming in, consider what it will take to simply get back to a normal unemployment rate of 5%. This is mindboggling.
The current labor force of 154 million will increase by about 1.8 million over each of the next five years because of “newbies” entering the job market. By 2014, the labor force will be around 163 million. A 5% U-3 (not U-6) unemployment rate would equate to 8.15 million workers without a job.
7.55 million jobs will have to be created to reduce the number of job-less workers from today’s 15.7 million to 8.15 million. To accomplish this, there would have to be 125,833 jobs created each and every month over the next five years with no jobs lost.
The average monthly job growth over the past 10 years has been about 50,000. The average monthly job growth over the past 20 years has been about 90,000. Keep in mind that the 1990 – 2010 timeframe hosted the biggest bull market and economic expansion in history. Do you see a 1990s and early 2000s bull market around you?
Explaining the unexplainable
The discrepancy between the stock market (NYSEArca: VTI) and the actual economy is as obvious as an approaching freight train.
The Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC), Nasdaq (Nasdaq: ^IXIC) and virtually all other indexes have rallied while the economy has only improved marginally. What caused this massive rally from the March 2009 lows?
After a 55% drop from October 2007 to March 2009, the indexes were extremely oversold and nearly everyone involved in investing had turned bearish, according to some polls, 4 out of 5 investors were bearish and sold stocks.
For contrarian investors, this is a buy signal. In fact, the ETF Profit Strategy Newsletter issued a Trend Change Alert on March 2nd and recommended to load up on long and leveraged ETFs such as the Financial Select Sector SPDRs (NYSEArca: XLF) and others.
As per this Trend Change Alert, the rally was to carry the Dow Jones (NYSEArca: DIA) as high as 10,000, and the S&P (NYSEArca: SPY) as high as 1,000. In hindsight, those target levels were too low. But at the time they were given, they were extremely optimistic and subject to laughter and mockery.
The end of this rally was to be marked by extreme optimism and a “the worst is over” attitude. Just as extreme pessimism marked the bottom of the previous downturn, extreme optimism was to mark the end of this overextended rally.
Students of market and price behavior know that a good time to square your positions is when everyone else is rushing to buy stocks, while the best time to buy is when “blood is on Wall Street.”
While news or economic numbers may influence stock prices for a day or two, the pattern of crowd behavior has provided a time-less, reliable template for investors. If things head up, it’s time to get out.
Granted, investor sentiment is not a short-term timing tool, but it raises a red flag. Such red flags appeared on a large scale in 2000 and 2007 and on a smaller scale in April 2008 and December 2008.
Even though the red flags were a bit pre-mature they all led to declines of 30% or more. A look at the chart shows that investors who sold out too early in 2000 or too early in 2007 were glad they did just a few months later.
Similarly today, the red flags may be a bit premature and don’t necessarily mean you have to sell today, but the chances that prices are lower, perhaps significantly lower months from today, are high.
For some sectors, the period of correction may already have begun. The utilities sector (NYSEArca: XLU), materials sector (NYSEArca: XLB) and health care sector (NYSEArca: XLV) are still below their prior low. China’s economy – the supposed engine behind the new bull market – is lagging, with the Shanghai Composite still below its August high.
For right now investor perception is more powerful than reality and any kind of news, even stagnant unemployment, results in rising stock prices.
Do you remember the time – during much of 2007, 2008 and 2009 – when any kind of news resulted in falling prices? Investor’s decisions are more emotional than rational. That’s why strong trends tend to persist longer than anticipated, as is the case with this rally.
Once the trend changes, however, watch out! The ETF Profit Strategy Newsletter provides regular short, mid, and long-term forecasts along with a target level for the end of this rally and the ultimate market bottom.
If history is correct once again, the broad investing masses will be buying close to the top and selling close to the bottom. It takes an out-of-the box thinker to stay ahead of the trend.