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Net Net: Promoting innovation and managing change

Money Anxiety Index: Stock Market Rally 'Totally Irrational'

The stock market rally worth about 300 points on the Dow over the past three sessions is "totally irrational," according to the curator of the Money Market Index economic barometer.

Traders work on the floor of the New York Stock Exchange
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In particular, investor enthusiasm over Friday's monthly jobs reportfrom the government is misplaced because a large portion of the 163,000 new non-farm jobs reported are temporarily and likely to vanish soon, says Dan Geller, chief research officer of the index.

"The rally on Friday after the release of the employment figures and the consumer confidence index really has no economic merit," Geller says. "It's totally irrational."

Like the surge in food service and other hospitality positions, the market surge will prove temporary as well, he says.

Looking inside the government's figures, which also showed the unemployment rateclimbing to 8.3 percent, many of the gains came from industries that generally benefit from summer vacation season.

Food and drinking establishments boosted hiring by 29,000, while temp services jobs increased by 14,000. Moreover, education and health care added 38,000, after falling 6,000 in the previous month, a move Geller attributes to the Supreme Court validating the national health care reform law. He deems those jobs to be "on shaky grounds."

Information services jobs related to motion picture and sound studios grew 11,000 "due to the increase in election-related activities. These jobs will disappear after the elections," Geller says.

When formulating the Money Market Index, Geller looks to more lasting attributes.

Specifically, he places a large weight on Personal Consumer Expenditures, which have been flat for two months. Another measure in the index, gross domestic productregistered an anemic 1.5 percent grow in the second quarter.

The index also factors in spending and saving numbers. Recent government data showed spending is flat while saving appears to be increasing.

The index is registering a 2012 high of 92.0 that, while lower than the same period last year, is indicative of worsening conditions.

"If we are going to continue on the path are are now on we are likely to see a recession by the end of the year," Geller says. "Unless something drastic happens to increase consumer confidence or reduce the level of anxiety, we will see a recession."

Despite what Geller sees as a shaky foundation, investors continued to buy the stock marketMonday, indicating at least a short-term rise in confidence that has generated a 9 percent rally over the past two months.

"Markets are cycles. The problem is everybody pins markets to economic cycles. That's not the case," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "Markets are just long-term cycles, and we haven't had a good stock market since 1998. At some point the market's going to do better."

Baum advises clients with a high level of anxiety to stick to what works — dividend-paying blue chips that are going to weather stormy markets.

"Once you get past the noise the whoever's going to be elected in the election and once you get past the euro, at least you own something that you know," he says. "If something happens to Coke and Johnson & Johnson and Kraft and Heinz, then the whole thing's bad anyway."

Indeed, it's been the market stalwarts that have led the way this summer.

The average Standard & Poor's 500 stock gained just 0.2 percent in July, but the largest 50 stocks in the group rose on average 1.46 percent. Dividend-payers rose 1.15 percent for the month and are up about 7 percent year-to-date.

"Everybody's complaining about the market zigging and zagging. My clients aren't zig-zagging," Baum says. "I own the AT&Ts , the Verizons , the Philip Morrises . I'm having a great year because those companies are doing well."

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