Fisher Investments Editorial Staff
US Economy

Reverse Logic

By, 01/09/2009

Story Highlights:

  • Thursday's unemployment report noted the number of new job seekers declined unexpectedly, while the total seeking unemployment benefits rose.
  • Friday's announcement employers cut 524,000 jobs in December and overall unemployment rose to 7.2% seemed more definitive.
  • But unemployment numbers are notoriously complicated and sketchy as economic indicators.
  • Unemployment tends to worsen through entire recessions, but a stock surge can be well underway before there's any "evidence" unemployment or the economy has improved.

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Of late, we've been seeing weak economic data daily. News release after news release seems to have something dour to say. We won't deny the economy's weak and will remain so for some time. But investors should stay strong in the face of a worsening economy—stocks don't care one whit for what's already happened or even what's happening now. That's long priced in. Stocks look forward and investors should too.

Thursday morning's headlines advertising the government's latest unemployment release were a mixed bag. The number of new applicants for unemployment declined unexpectedly, while those continuing to seek benefits rose—a typically confusing result. Friday's announcement employers cut 524,000 jobs in December and overall unemployment rose to 7.2% seemed more definitive. But unemployment numbers are notoriously faulty as economic indicators and can have contradictory messages.

Faulty government statistics aside, while higher unemployment is bad news for individual job seekers, must it be bad news for investors? Not historically, no. Unemployment tends to rise through a recession's duration as firms cut costs to stay afloat. Historically, job losses peak at the end of recession or even after recovery has begun.

The good news? Because the stock market is a leading indicator, a stock surge can be well underway before there's "evidence" unemployment or the economy has improved. It takes time for economic recovery to be felt, and more time for it to show up in official numbers. So, it may feel and seem like bad times continue, even if a recovery's underway. Markets tend to rise in anticipation of a brighter day—even though few notice it.

Higher unemployment should be expected. But higher unemployment won't cause the economy to turn worse or cause markets to drop. This is reverse logic. While higher unemployment is unsettling, even a little bitter to swallow, it's ultimately not a good reason to stay away from stocks—quite the opposite in fact.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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