Why Is the Market Going Up When Jobs Are Going Down? 41 comments
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By Brandon Clay
Last month the national unemployment average rose to 9.8%. It’s actually at 17% if you count distressed and underemployed workers. Not only is unemployment data weak, it’s getting worse. Former Fed chairman Alan Greenspan said unemployment would hit at least 10% before turning back.
Even with this well-known data, the market is going up. The S&P 500 is sporting a mostly gentle uptrend from March to October. The market thinks we’re recovering. Bernanke and company have said as much. However, given that we have the toughest job market in a generation, to me it seems a little premature to declare recovery – at least a strong one.
I’m not alone in my assessment. CNNMoney.com’s Editor At Large Paul LaMonica recently said, “Repeat after us. There is no strong recovery without job growth. There is no strong recovery without job growth. Why does Wall Street not get that?”
A good question. Why is the market going up while jobs are going down?
It makes even less sense when you consider the nature of unemployment. It goes back to demand. When companies experience demand for their products and services, they will seek to meet that demand. If meeting that demand requires more labor, they will hire. It’s ECON 101. If companies hire, then unemployment goes down. People return to Starbucks to order their Double Skinny Lattes.
But that’s not what is happening. Instead, companies are cutting jobs. Why does the market go up while this is happening?
To this humble market observer, it seems that most of the buying pressure is coming from earnings. Quarterly profits have been good, often better than expected, primarily driven from falling operating expenses. Operating expenses are falling because many large companies are…you guessed it…cutting jobs. There are other factors, but job cuts are definitely helping the bottom line.
In recent days, Sun Microsystems (JAVA), The New York Times (NYT), Dell (DELL), St. Jude Medical (STJ) all shed jobs to stabilize their businesses. And these companies aren’t even banks. We just crossed the 100 barrier for failed banks in the US this year. I’m not sure where all those employees have gone, but they aren’t helping keep unemployment rolls under 10%.
Despite the slumping jobs market and rising stock market, I am often reminded of economist John Maynard Keynes’ aphorism. “The market can stay irrational longer than you can solvent.” This may be one of those times.
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This article has 41 comments:
Three reasons
1) PPT
2) greater fool theory (operating LIKE I HAVE NEVER SEEN BEFORE,) stemming from the perpetration of accounting fraud.
3) government intervention (stealing taxpayers money on a level NO ONE HAS EVER SEEN BEFORE)
The greater fools are those who are sitting out the rally, and trying to short a fundamentally driven market, which properly takes positions after the profitability engine is in place, and awaiting the final leg of the recovery, the hiring signs on main street. Frankly, bigger profits will come maintaining a prudently managed operation than will hiring bodies and burning cash. Every business owner knows that and stock investors are no different.
On Oct 26 04:59 PM Sirvasq wrote:
> Can you be any more naive? For businesses, this is a simple and time-honored
> judgment: cut back on labor, and become more efficient in response
> to lower revenues (2008). In the process, discover how much fat and
> lack of cohesion was present in the boom economy. Then, with a leaner,
> profit-yielding machine in place, profits beget confidence, which
> begets expansion. Stock players are not stupid; it's their money
> at risk. They put it at risk when conditions favor expanding PE ratios,
> like now. Notice the pace of earnings (not revenue, which is not
> the holy grail, that was the '90s) UPGRADES preceded this rally.
> See the documented analysis by Bespoke earlier today.
>
> The greater fools are those who are sitting out the rally, and trying
> to short a fundamentally driven market, which properly takes positions
> after the profitability engine is in place, and awaiting the final
> leg of the recovery, the hiring signs on main street. Frankly, bigger
> profits will come maintaining a prudently managed operation than
> will hiring bodies and burning cash. Every business owner knows that
> and stock investors are no different.
You can only have a lean, profit yielding machine if the top line goes up too. Once the smoke and mirror earning improvements can't be generated any longer, we'll really see the shape of the so-called recovery. If unemployment is going up, and companies are paring down to improve the bottom line, there ain't gonna be anybody to buy the products to keep up that top line.
This is NOT a fundamental rally. It's an emotional one.
Here's a question:
What if our companies hire abroad, make profits abroad, and bring home the bacon to Uncle Sam?
That surely would be a 'Wall Street' recovery...
Regarding Main Street - strangely enough, the only thing I can see curbing job loss is sky-high oil prices (which will impact shipping/trade). So far so good...
In short we are fixing these sectors by breaking everything else.
"What if our companies hire abroad, make profits abroad, and bring home the bacon to Uncle Sam?
That surely would be a 'Wall Street' recovery..."
You make a good point, but replacing 70% of our GDP via outsourcing in one or two quarters would be a pretty impressive trick.
Call me jaded.
On Oct 26 08:26 PM Seth Chalnick wrote:
> Ricard, you write:
>
> "What if our companies hire abroad, make profits abroad, and bring
> home the bacon to Uncle Sam?
>
> That surely would be a 'Wall Street' recovery..."
>
> You make a good point, but replacing 70% of our GDP via outsourcing
> in one or two quarters would be a pretty impressive trick.
Everyone who questions what is going on, implicitly or explicitly says or believes that.
I don't know that would have been better. Do you? Do you have a model of what that would look like, that kind of devistation.
Let's say you had the power to wreck that kind of devistation on innocent people...would you? Or would you do what's being done now, with a hope for the best...as being done now.
I'm not taking a political position...I'm looking at where my $$ were in March, where they are now, and what would have happened if "THEY" just let it fall so we could pick up the pieces.
I'm interested and you should be, I believe. If we have just put off the fall, what will the fall look like and what's the best way to deal with it. BUt, why it's going up and should it be going up is not really helpful in terms of planning.
We've seen this movie before. It is not unusual. Whether you think it is rational or not, it is the norm.
They spin off a chunk of the business to an offshore subsidiary.
What if they witness a US government that is increasingly intrusive and anti-business?
They move headquarters offshore for good.
What if they want to hire within the US but the healthcare system overhaul makes it prohibitively expensive to hire American?
They continue to hire abroad.
A global economy means that your country's corporate tax structure, business friendliness, and labor affordability are continually being compared to the rest of the world. We are so far behind in all three, but I have no idea what it's going to take to get our legislators to recognize the problem.
On Oct 26 10:42 PM David Van Knapp wrote:
> To answer the question in the article's title: Markets historically
> have gone UP during recessions, WHILE jobs are going down. See the
> chart of the last 9 recessions in this article: seekingalpha.com/artic...
> . For those of you who don't look, I'll tell you what it shows: In
> 8 of the last 9 recessions before this one, the unemployment rate
> continued to rise for months AFTER the S&P 500 bottomed out and
> started to rise. In some cases, the unemployment rate continued to
> go up for awhile even after the "official" end of the recession (as
> dated by the NBER).
>
> We've seen this movie before. It is not unusual. Whether you think
> it is rational or not, it is the norm.
On Oct 27 12:05 AM GreenMom wrote:
....
> compared to the rest of the world. We are so far behind in all three,
> but I have no idea what it's going to take to get our legislators
> to recognize the problem.
What did Nasdaq 5000 predict ? Even last year the Dow was near a high just before the Great Recession.
The best anecdotal quote is that the market predicts or represents fear and greed.
When consumers go shopping they won't be putting Americans to work, but more likely than not, the Chinese.
How can the job situation improve much? Sure we can export goods but as we have seen, we import more than we export, and when the recovery comes, our trade deficits will also climb. I would call this a Catch 22.
Geithner, et al. are busy trying to revive the economy. They have no interest in the American people (which they see as mere peasants) at all.
On Oct 26 04:59 PM Sirvasq wrote:
> Can you be any more naive? For businesses, this is a simple and time-honored
> judgment: cut back on labor, and become more efficient in response
> to lower revenues (2008). In the process, discover how much fat and
> lack of cohesion was present in the boom economy. Then, with a leaner,
> profit-yielding machine in place, profits beget confidence, which
> begets expansion. Stock players are not stupid; it's their money
> at risk. They put it at risk when conditions favor expanding PE ratios,
> like now. Notice the pace of earnings (not revenue, which is not
> the holy grail, that was the '90s) UPGRADES preceded this rally.
> See the documented analysis by Bespoke earlier today.
>
> The greater fools are those who are sitting out the rally, and trying
> to short a fundamentally driven market, which properly takes positions
> after the profitability engine is in place, and awaiting the final
> leg of the recovery, the hiring signs on main street. Frankly, bigger
> profits will come maintaining a prudently managed operation than
> will hiring bodies and burning cash. Every business owner knows that
> and stock investors are no different.
On Oct 27 01:22 AM Options Trading wrote:
> The stock market is a discounting mechanism. It anticipates and discounts
> future value to present price and typically leads the real economy
> by a matter of months. The market has been rising due to economic
> recovery expectations even though unemployment rate is still rising,
> investors are expecting a bottom and is pricing in future value now.
> In fact, you can see the same expectations in the bonds market from
> the bond yield curve. In fact, things like the ISM index and the
> leading indicators have been predicting a much better 6 months later
> and that is what investors are buying into.
The market lags the economy by the usual 6 months. So, hopefully more jobs are coming.
In addition, the market was too low in Feb. and some cash on the side line moved in.
Now, the market is not cheap and without the employment improvement, it could head south before north.
On Oct 27 01:22 AM Options Trading wrote:
> The stock market is a discounting mechanism. It anticipates and discounts
> future value to present price and typically leads the real economy
> by a matter of months. The market has been rising due to economic
> recovery expectations even though unemployment rate is still rising,
> investors are expecting a bottom and is pricing in future value now.
> In fact, you can see the same expectations in the bonds market from
> the bond yield curve. In fact, things like the ISM index and the
> leading indicators have been predicting a much better 6 months later
> and that is what investors are buying into.
GreenMom's comments regarding the emerging environment for American business is right on the mark. Someone should have explained to Obama that making war on the U.S. Chamber of Commerce might not be the best way to honor his pledge to create millions of new jobs.
The same experts will be upgrading the market at 12000. They are doing it to grab a portion of a pie for themselves.
On Oct 27 12:05 AM GreenMom wrote:
> What if companies hire abroad and make profits abroad, and come to
> realize their profits are robbed by US corporate taxes?
>
> They spin off a chunk of the business to an offshore subsidiary.
>
>
> What if they witness a US government that is increasingly intrusive
> and anti-business?
>
> They move headquarters offshore for good.
>
> What if they want to hire within the US but the healthcare system
> overhaul makes it prohibitively expensive to hire American?
>
> They continue to hire abroad.
>
> A global economy means that your country's corporate tax structure,
> business friendliness, and labor affordability are continually being
> compared to the rest of the world. We are so far behind in all three,
> but I have no idea what it's going to take to get our legislators
> to recognize the problem.
What is the reason for this?
On Oct 28 06:56 AM prairiedog555 wrote:
> "4th reason: Declining dollar. (The dollar's inverse correlation
> with the market is a very significant .80, according to SA author
> David Goldman. The market action of the last few days has strongly
> inversely correlated with the dollar.) "
>
> What is the reason for this?
On Oct 27 07:40 PM CLH wrote:
> We can have 90% people working and have a great economy. It seems
> you are the one who is naive. During the 1950s few women worked and
> we had a great economy with 50% of people unemployed.
> Everyone on my street is working. There are no homes for sale on
> my street. Healthy milk going for $8.50 a gallon. Inflation upon
> us. Fed needs raise rates at least 1% that will not derail recovery.
Fascinating social commentary. Back then, tax levels did not require two earners per family in order to enjoy a reasonable standard of living. But my father worked two jobs anyway so that we could enjoy a middle-class standard of living, and my mom stayed home to cook, clean, and make our clothes. And we thought the economy was pretty good. Today, even when one spouse earns enough to provide a very good standard of living, the other spouse works to keep up with the materialistic Joneses and they spend 105% of their combined incomes.
On Oct 27 07:40 PM CLH wrote:
> We can have 90% people working and have a great economy. It seems
> you are the one who is naive. During the 1950s few women worked and
> we had a great economy with 50% of people unemployed.
I think off-shoring will be a permanent fixture regardless of what we do - capital seems to work from the bottom up, and we are at the top of the pyramid.
Perhaps I should be re-organizing my investments to further emphasize emerging markets...
On Oct 27 12:12 PM Alphameister wrote:
> On the surface, this does look very much like a conventional recovery
> with stocks leading the way and employment lagging, as is almost
> always the case. But any top-line growth being reported today is
> derived primarily from participation in the Asian expansion. Untill
> somebody can explain to me how domestic growth will proceed in the
> face of high and rising unemployment, housing prices resuming their
> downtrend after a seasonally and fiscally induced upward blip, and
> foreclosures climbing materially into the foreseeable future as more
> and more owners find themselves underwater, I will regard the past
> two months of stock appreciation as unenlightened.
>
> GreenMom's comments regarding the emerging environment for American
> business is right on the mark. Someone should have explained to
> Obama that making war on the U.S. Chamber of Commerce might not be
> the best way to honor his pledge to create millions of new jobs.
Good luck with that 1% interest rate hike, which while I agree we need it to bring this crazy pyramid scheme down... will not only wipe out your home equity... but really kill consumer spending as the small business owners and svp's on your block lay employees off, get displaced themselves, and start cutting back to the good ole' fashioned $2.50 per gallon staples.
Let's not get ahead of ourselves here... first deflation... then rampant inflation.
And no one noticed.
Yet the American portion of the GDP has been shrinking for years. And Wall St (and tax collectors) cheered.
On Oct 26 09:07 PM Ricard wrote:
> They don't need to replace all 70% of consumption...just maybe 10%
> or so, if even that. Costs saved from using the guillotine at home
> would help cos get that much closer that much faster.
>
> Call me jaded.
At best it would be 90% of approximately 75% of our adults.
Between incarceration, pensions, social security, disability, welfare and sugar daddies, at least 25% of our population PLUS children don't work.
With the massive taxes and costs coming our way, we need 90% employment including all of those that don't work now.
Will never happen.
On Oct 27 07:40 PM CLH wrote:
> We can have 90% people working and have a great economy. It seems
> you are the one who is naive. During the 1950s few women worked and
> we had a great economy with 50% of people unemployed.