Jobs No Problem for Market as Long as Fed is Around
While it might not be a Goldilocks economy, it just may be a Goldilocks unemployment rate as far as investors are concerned: Not too cold as to indicate a double-dip, but not too hot so as to push the Fed to the sidelines.
The latter consideration—just when the Federal Reserve may start its exit strategy from printing the money that pumps up the stock market—is at the nexus of investor concerns.
Wall Street is in the midst of an aggressive rally precipitated by Fed Chairman Ben Bernanke's remarks last August that another round of its quantitative easing program was on the way.
So the release of Friday's tepid nonfarm jobs report, indicating lower-than-expected job growth coupled with a dip in the unemployment rate, fit well within the Wall Street narrative.
"The bulls are in charge right now, so finding the good in a number like this would be to suggest that if we got a significantly better number it would have changed expectations for Fed policy," says Liz Ann Sonders, chief equity strategist at Charles Schwab in San Francisco. "The best environment for the stock market would be something in the four percent GDP growth range with a steady but not aggressive fall in the unemployment rate and inflation that stays in check."
As Sonders points out, that correlates to a term popular in economics before the financial industry collapsed in 2008. "Goldilocks" was an affectionate reference to an economy that was not too hot and not too cold, but just right in terms of growth.
But in the case of what has happened since the Fed began injecting liquidity into markets by buying Treasurys and other debt, this may be more a story of Goldilocks with a bit of a substance abuse problem.
"As long as we have continued stimulus it's like a market on crack," says Keith Springer, president of Springer Advisory Services in Sacramento, Calif. "You keep throwing crack at it and it's going to keep going up. Eventually you have to go through withdrawal, and then the bubble bursts."
The unemployment report offered a mixed bag of results.
The total amount of out-of-work adults dropped from 15.1 million in November to 14.5 million in December. When adding upward revisions of 70,000 from previous months, the job creation number of 103,000 was more or less in line with consensus (though stunningly below the projection of 297,000 from ADP earlier in the week).
On the other hand, the labor force participation rate reached lows not seen in nearly 30 years and a more encompassing rate of unemployment measure known as U-6 dropped but was at a stubbornly high 16.7 percent.
The market's immediate reaction to the data was largely a shrug, though stocks weakened as the session drew on.
"The market is underreacting to this report. It's the composition of the report that bothers me. There were no real jobs created," says Jeff Kleintop, chief market strategist at LPL Financial in Boston. "Reports like today remind us that this is not going to be a straight line higher. We are going to see some volatility and are setting up for a little pullback in the market, which will create a much better entry point."
But it's exactly the notion that job creation will be slow that could keep the stock rally going.
Making sure employment is at a high level is half of the Fed's dual mandate—the other half is controlling inflation—so if unemployment persists, it will keep the central bank's liquidity machine at work pumping up the market.
"There's this big war going on between bulls and bears and no one is taking charge here," says Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati. "You could argue (the unemployment report) does open the door for the Fed to keep the pedal to the medal to try to keep this stock market higher. They have the ammunition to do it."