The stock market is celebrating the perceived strong jobs report today, but I see the rally premature and ill-advised. The gains of stocks broadly, are therefore on poor footing and should retrace after retrospection.
Friday Morning Change
SPDR S&P 500 (SPY)
SPDR Dow Jones (DIA)
PowerShares QQQ (QQQ)
iShares Russell 2000 (IWM)
Wilshire 5000 (WFVK)
Stocks gapped open higher, as indicated by the chart of the SPDR S&P 500 here, on the 8:30 AM EDT release of the monthly Employment Situation Report.
Chart by Yahoo Finance
The market is excited because if employment is truly improved by three-tenths of a percent to 7.8%, then the economy is on a better track. If more people are employed, consumer spending should improve and America's companies should see better earnings per share results.
The gain to the bottom line of the P/E equation would not be the only improvement. Confidence would rise in our economy and on our outlook, and so the value given to stocks would expand on expectations of better earnings. Thus, the numerator of the P/E valuation metric would also improve.
Alas, the problem is that the gains in the jobs report are suspect, at least in my view. First of all, the nonfarm payroll gain of 114K for September is nothing to write home about. Furthermore, in an earlier article, I noted that the under-employment rate was unchanged in September, even as unemployment improved. Moreover, its absolute level of 14.7% is still troubling. And the gain in the unemployment rate came on higher part-time employment, not full-time, which would be worth celebrating. Thus, any spending gains would be tempered, since part-time workers make less than full-time employees do generally.
A hungry market celebrated this data for two reasons. First and foremost, at least it didn't show deterioration. Unfortunately, on a fractional basis, the under-employment rate actually deteriorated slightly. Still, with the focus of the market and the nation on the headline figure, an improvement is at least better than deterioration, even given its faults. Second, the report shows improvement on some basis, because one might say, at least more people are working, whether it be part-time or full-time. Unfortunately, on net, the change in employment to part-time also drives lower overall income produced for the economy.
Stocks of cyclical companies like financials and others are higher on the day as well. These stocks have beta ratios above 1.0, indicating their sensitivity to the broader economy and market. They therefore exaggerate the moves of the market, and they are doing so today on this report.
General Motors (GM)
General Electric (GE)
Unfortunately, given my view that the gains are suspect and on poor footing, and with a fiscal cliff, slowing global economies, and Iran confrontation ahead of us, I recommend investors sell on rallies at least through October and potentially through the close of the year, depending on the election.