Freaky Friday

Story Highlights:

• Unemployment, oil, inflation and a nuclear showdown dominated Friday's headlines.
• Much of the move was likely technically, not fundamentally, driven.

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Next Friday is Friday the 13th, but the freak-out came a week early. US stocks fell over 3% Friday, walloped by negative news. It may have felt earth-shattering, but a closer look raises important questions. Let's take a look.

Unemployment Rate Jumps to 5.5% as Economy Continues to Shed Jobs
By Brian Blackstone, The Wall Street Journal

US unemployment unexpectedly jumped to 5.5% in May—a huge one-month move, but still well below the 30-year average of 6.1%. However, reality is probably not as dire headlines purport.

Consider two key figures from the Household Employment Survey (which is used to calculate the unemployment rate): Seasonally adjusted unemployment rose by 861,000, while employment fell by only 285,000. In other words, 861,000 more people said they weren't working, while only 285,000 folks said they lost their jobs. Where did the other 576,000 people come from?

One possible explanation: Every year around this time, new college grads enter the "real world." While these people look for work, they're excess labor supply. The household employment survey is notoriously volatile, and new grads and students on summer break can make it even more so from April through July.

The Bureau of Labor Statistics tries to account for this by seasonally adjusting data, but this can actually muddy the picture. There's a huge discrepancy between May's seasonally adjusted and non-seasonally adjusted data. While seasonally adjusted data reflects a 285,000 decrease in jobs, non-seasonally adjusted data reflects a 5,000 increase. There's a reasonable chance seasonal adjustments aren't properly timing the new workers entering the work force. It's probably harder for younger people to get jobs today than a few years ago, but it doesn't mean overall employment is plummeting. Unless you believe the government can accurately account for everything from the timing of graduations to the number of students who choose not to work in a given summer, it doesn't make sense to put too much faith in one month's unemployment figure.

Fortunately, while the household survey may be skewed, there are other indicators that help show labor market health. One is the Establishment Survey, which reflects changes in the number of jobs or payrolls at large firms. While this has shown declining payrolls over the last few months, the results have been better than too-dour predictions: A 49,000 decrease, versus an expected 60,000 decline.

Unemployment wasn't the only concern Friday. Oil was another:

Oil Surges $11 to Record $138
By Catherine Clifford and Ben Rooney, CNNMoney.com

Israel's Transportation Minister (a contender for Prime Minister) threatened to attack Iran if it didn't cease its nuclear program. An Israeli attack on Iran could materially interrupt oil supply, not to mention impact worldwide political stability.

But was this threat, combined with a moderately weaker US dollar, enough to send oil up by a record one-day amount? Not likely. Instead, it was probably enough to trigger a massive short squeeze, a technical factor that shakes oil bears out of the market. Looking at intraday charts for oil confirms this suspicion. And as oil skyrocketed, investors panicked and left the stock market en masse—as can happen on spiking short-term fears. This was a classic freak-out episode.

Yes, bad news can cause a short-term panic. But there's no predicting panic, and you shouldn't try to market-time your way around it. Like today's news, market volatility isn't new, and as bad as recent developments seem, we still don't believe they have the power to hold stocks down for long. So save your freak-outs for black cats on the real Friday the 13th. Overall, we still think fundamentals are stronger than universally accepted—an important ingredient for a resurgent bull market.