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Earnings, Not Jobs, GDP, Has Driven Bull Market

Earnings, not employment, reported this Fri, or GDP last, has directly driven the bull market.

Conflating the state of employment and the economy with that of corporate profits and the stock market accounts for much muddied analysis and poor investment decisions the past three years.

Fri's Apr nonfarm payroll is expected to increase 165k, from 120k in Mar, down from an average 258k in Jan-Feb. Initial jobless claims 4-week ma has increased from 363k 3/31 to 382k 4/21, see charts.

So far 1Q earnings of SPX are up 5-6%, versus estimates close to 0% (about 74% "beat," a contrived game). Stoxx 600 companies have beat estimates by 7%. Both indexes rallied off recent lows last week.

The now 3-year bull market has been driven by strong earnings, extremely low interest rates, and below average market p/e, with periodic scares about Europe debt.

The U.S. had had a very strong recovery in profits and stock prices, SPX up 111% from its Mar 2009 lows. It has been very weak versus the past for growth of employment and GDP, see charts.

In the long run the stock market discounts corporate cash flows. Employment and GDP mainly matter to the stock market not in themselves, but in how they impact earnings, interest rates, and risk premiums.

That impact can be more direct, e.g. on revenue growth and profit margins, or indirect, e.g. systemic financial and political risks, e.g. in Europe (Spain's unemployment is 24.4%).

From the WSJ Fri, "Thirty-five big U.S.-based multinational companies added jobs much faster than other U.S. employers in the past two years, but nearly three-fourths of those jobs were overseas."

Arguably stubbornly high unemployment would increase the chances of Obama losing the election, which market consensus probably might consider positive for stock prices.

LEFT CLICK on charts to enlarge. For real GDP and total nonfarm employees, holding a clear straight edge along different sections of the line (trying to visually best fit a regression) will help show the shifts in growth rates (those are log charts) over decades, and where current values would be now if those shifts had not occurred.