Thursday, the Dow Jones Industrial Average breached and closed above 17,000 for the first time in its history, and the Bureau of Labor Statistics reported US employers added 288,000 jobs in June (262,000 of which were in the private sector). All this positivity provided an answer to the question, “What do you get when a widely watched, late-lagging indicator again beats estimates and a flawed index that many folks cling to tops a round number?” The answer: some mind-melting analysis investors should chalk up as mere noise.
The very special day-early jobs report was resoundingly positive. It was the fifth consecutive month in which nonfarm payrolls grew by more than 200,000 jobs, bringing total year-to-date job gains to 1.385 million. April and May were both revised higher, April to 304,000 and May to 224,000 (from 282,000 and 217,000, respectively).[i] The unemployment rate fell from 6.3% to 6.1%. The labor-force participation rate—a common target of skeptics in recent months—remained at 62.8% for the third straight month. The number of long-term unemployed workers fell. The U6 unemployment rate fell to 12.1% and is down 2.5 percentage points in the last 12 months. Since the U6 is broadest measure of unemployment, including the underemployed (those working part-time because they can’t find full-time work), discouraged workers and workers marginally attached to the workforce (fuzzy terms, at best), some pundits claim this proves the report was strong across the board.[ii] Cue the fireworks.
So when markets opened about an hour later and the Dow Jones Industrial Average[iii] ticked up through yet another round number—17,000(!)—analysts were quick to wag a causal finger at that gangbusters jobs report. The preponderance of analysts and strategists interviewed by major financial publications seemed to conclude the continuation of strong hiring patterns shows Q1’s GDP dip was an anomaly—bullish(!). One analyst interviewed by Bloomberg suggested, “This is stuff that is going to lead to upward revisions of second quarter growth rates and it starts off the third quarter in a real positive momentum place.” An economist interviewed by The Wall Street Journal claimed, “This is one welcome Fourth-of-July report for the outlook.” The new jobs “are just the fireworks the economy needs to brighten up.” Elsewhere, in light of the strong jobs figures, an economist questioned the Q1 GDP dip, saying it was “not to be believed.” Yet another analysis suggested the report shows that “economic growth can support stock benchmarks at all-time highs.” Which is good, because others tell us (oddly) that this round number will have a magic impact: “While this could prompt some people to sell, I’d expect it to trigger more buying than selling [because it is a reminder stocks have been going up].”[iv] This is all just a wee bit confused.[v]
To be clear: We agree with the conclusion Q1’s GDP dip is likely a statistical snafu caused partly by cold winter weather, and the three principal drivers of stocks over the next 12 months—political, economic and sentiment drivers—do support continued bull. But claiming this jobs report validates that view means forecasting based mostly on a late-lagging indicator. In this very economic expansion, growth began in June 2009. However, private sector employers were shedding jobs through February 2010, and the U6 unemployment rate didn’t peak until that April. That’s nearly a year after growth resumed. There isn’t that much reason to believe current hiring stats really show a rebounding economy. They may say more about what happened in mid- to late-2013 than anything in 2014. Growth begets jobs, not the other way around. Analysts suggesting jobs imply future momentum or that a growth resumption is already underway commit a logic error. A lagging indicator cannot tell you anything about the future.
If Thursday’s jobs fireworks tell you nothing about the economy’s direction, they tell you even less about stocks’ future direction. Stocks are not underpinned by anything ongoing in the economy right now—they’re a forward-looking indicator. Growth a quarter, two or three from now is what matters more. By the time the official data confirm growth, stocks will already have registered that. And moved on. Basing an outlook for stocks—even indirectly—on jobs gets that whole leading/coincident/lagging thing backwards. This exact reason is why investors shouldn’t fret Q1’s dipping GDP. Not only is it (in all likelihood) caused by fleeting factors, it’s over.
What else doesn’t tell you anything about stocks’ future direction? The level an index attains, round number or no. This is all past performance, same as a record high (just with lots of zeroes). How fast you got there? Not relevant, though one might expect it to be faster to get from a big round number to the next big round number, just due to compound growth. So maybe someone ought to start stitching those Dow 18,000 hats for next time so traders don’t have to cheekily tape handwritten notes to their heads when it comes? (Sewing those might create a job or two as well! A self-fulfilling prophecy![vi])
Now, here’s the good news: Euphoric investors tend to explain away negative data, and there are worse reasons to be bullish than a positive jobs report. Ultimately, with Leading Economic Indexes suggesting global growth is likely to continue, politicians (thankfully) mired in gridlock and sentiment just starting to perk, stocks seem to have plenty of room to run. Perhaps through more big round numbers!
[i] Source: US Bureau of Labor Statistics, Employment Situation Report—Establishment Survey. Change in nonfarm payroll employment, June 2014.
[ii] Discouraged is a technical term in this case. It means unemployed workers who are not actively seeking a job due to economic reasons. Marginally attached workers are those who say they want work and aren’t actively seeking a job for any reason but have looked at some point in the prior 12 months. Is that fuzzy enough for you?
[iv] No word on exactly who these round-number-triggered buyers will buy from if selling is so scarce.
[v] Confusing too! Consider: “So we all generate emotional convictions, e.g. if the S&P reaches 1950, there will be a correction, or if the S&P reaches 1950, it will go to 2000.” So … if the S&P goes to 1950 some folks somewhere will think one of two directly opposing things?