Labor Stats, Recessions and The Market

by: Mike Goodson, CFA

I often wonder how it would be if a person had perfect insight to a macro series like the monthly labor report.

As we all know now, the August report (a loss of 4,000 jobs) was an anomaly that was revised upward with the release of the September job report. Recall if you will the kind of commentary we heard in the media following the August jobs report. People were very concerned that the weak housing market and other factors were impacting job growth and that a recession was just around the corner. The talking heads were all concerned about this gloomy outlook and the usual shows featured the usual "gurus" telling investors to prepare their portfolios for the looming recession and to get as defensive as possible.

Following the August revision and much happier September release last Friday (guess that pesky recession's been postponed again...), the market continued to rise and is now about 8.5% above where it closed after the August jobs number and up over 11% from August's low-water mark. Following the September release, the talking heads could do little but present a poor imitation of Gilda Radner's Emily Litella character from SNL, "Oh, that's very different? Never mind!" Then they launched into a new segment on what momentum stocks one should buy now that the upward trend had been reestablished.

Aside: I had to laugh at NPR's take on the August revision. It characterized the original release as some kind of mistake, an error or even a lie (my take), as if George W. was trying to deceive the nation or somehow his Halliburton-made calculator was spitting out bad numbers. "Tsk, tsk," went its condescending tone, "can't this administration do anything right?" End aside.

What a hard way to try to make money! An investor who tried to get more defensive in August probably would just finished selling stocks near the bottom or would have owned exactly the wrong kind of stocks to capture the upward move that followed. That same investor (the poor person who tries to make money watching the talking heads) would now be selling the defensive stocks and buying back the winners he or she sold in August.

This is one of the main reasons I spend very little time worrying about short-term moves in the market or the monthly economic releases. Even if you had perfect insight about the August and September labor stats, could you make a lot of money? Would you have bought following the August number knowing it would be revised upward? By the time the September figure came out, the market had already made a nice move.

On a plane last week, I sat next to a very charming fellow who used to work as an economist for the US Treasury Department and the United Nations. Now he spends all his time trading his own account and taking month-long trips with his wife to India or the backwoods of Bolivia. He thinks that many of the numbers released by the government are often not accurate to the extent that the market would like. In fact, he was very certain the August jobs number was too low. He used the weakness in the market following the number to position his portfolio aggressively so he would make money when the market eventually figured out that this number was not truly reflective of the economy's real status. So, to answer my original question, one CAN make money trading around some of these stats, but only if you do your own work, have some kind of original insight regarding them and are willing to trade "against the grain" of conventional wisdom.

This is not my style, but I can see the merits of doing it this way.