Friday's Positive Employment Report May Be a Red Herring

Includes: DIA, IVV, SPY
by: IndexUniverse

Investors probably can't help wondering if the markets are just toying with them. On Friday, October 5, the S&P 500 rose about 1% and closed at another all-time high. This time it was 1,557.59.

The index's most recent high close before that was 1,553.08 on July 19. You remember July 19—that was the day both the Dow Jones Industrial Average and the S&P 500 reached new highs (with the Dow breaking 14,000). It was also a market high point before the subprime mortgage market meltdown (say that five times fast) kicked off a credit crunch and a rather scary roller coaster ride for U.S. stock markets that ended up having global repercussions.

It was, many thought, the beginning of the end—at least for the bullish part of this market cycle. Before the S&P 500 started going back up, the S&P 500 was down 9.42%. The Dow busted through another all-time high close record on Monday of last week to end up at 14,087.55, and on Friday hit an intraday high of 14,124.54 before closing slightly below record levels.

Mainly, a positive jobs report seems to have been the catalyst for Friday's surge. For one thing, the change in the number of jobs for August was adjusted upward from a loss of 4,000 jobs to a gain of 89,000. And the figure for September was 110,000 jobs added. The unemployment rate rose less than one-tenth to 4.70% for September. And the Federal Reserve Board's vice chairman, Donald Kohn, further bolstered investor confidence with his announcement that he expected moderate growth and high levels of employment after a short period of weakness caused by the issues in the housing and credit markets. However, Kohn also said that loans for home buyers would be harder to come by.

So does all this mean the consequences of the subprime market fallout have come and gone, as many investors seem to believe, if you go by the performance of the major market indexes?

Well, you might not want to jump on the optimists' bandwagon just yet. Some economists say the data indicates that the labor market is weakening despite the added jobs. And although consumer spending has held on tenaciously and weathered the subprime catastrophe fairly well, future behavior is uncertain.

Finally, there's the housing market, which is in a full-blown slump, with no end in sight - and problems in the housing market can spread to other areas like the flu in winter. While the word on jobs is fairly upbeat and the market rally is likely a good sign, there are too many variables in play for anyone to say definitively that the market has shaken off the subprime implosion.

Written by Heather Bell