Upside-Down Wall Street, As Weak Job Numbers Goose The Market

Includes: DIA, SPY
by: Daniel Sckolnik

"Experience: that most brutal of teachers. But you learn, my God do you learn." - C.S. Lewis

To a certain degree, Wall Street is somewhat in "Alice in Wonderland" territory, where up is frequently down and vice-versa. How else can anyone explain an equity market that is pushing five-year highs even though U.S. growth is virtually stagnant, unemployment numbers are stubbornly stuck at plus 8% levels, and the global economy is, in general, teetering around recessionary levels?

Well, of course, there is always the Fed factor, which seems to be on the cusp of White Rabbit/Cheshire Cat terrain most of the time.

Investor expectations of the Fed pulling the trigger on QE3, something of a given as recently as last week, may have ebbed a bit as the market made a nice upside move on Thursday, with the Blue-Chip Dow Jones Industrial Average (DJIA) gaining over 200 points and the benchmark S&P 500 Index (SPX) rising more than 25 points. Of notable significance was the fact that both of these closely tracked indexes moved past psychologically important levels, with the Dow nicely above the 13,000 mark and the SPX above its 1,400 level. With the market performing with a newfound robustness that originates, no doubt, in a momentarily rejuvenated Europe, why would the Fed feel the need to respond with an expanded balance sheet?

Therein lies the rub, or more accurately, the disconnect, between Wall Street and the domestic economy.

Disappointing jobs data on Friday kept Thursday's rally from going much further. U.S. government data revealed that employment growth had slowed fairly significantly in August, which contrasted with many economists' expectations. This bad news for the economy- and possibly for the current administration in Washington- could lead to good news for investors, as it provides the necessary cover for Ben Bernanke to pull the trigger on further stimulus. Had the job numbers been better, Ben might have deferred to the Fed hawks that shy away from any additional stimulus.

So, for those who are attempting to keep score, bad economic numbers equal good Wall Street prospects, due to stimulus potential. However, in spite of the equity market hitting highs not seen since 2007, unless the employment picture improves to levels somewhat closer to that same time period, the market will eventually "catch up" to the economy or more accurately, "catch down."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was originally posted to the Sabrient site, and I am an analyst for Sabrient. However, the opinions are my own, and I do not receive any compensation for writing about a specific stock or ETF.