Who Needs Jobs when Wall Street Has the Fed?
Published: Friday, 3 Dec 2010 | 1:15 PM ET Text Size
By: Jeff Cox
Pay no attention to those 15.1 million unemployed people—Wall Street instead is more focused on the man behind the Fed curtain and what he'll be doing to fire up the equity markets.
Friday's significantly disappointing jobs report, which under normal circumstances would have sparked a significant selloff in the stock market, instead was greeted only with more expectations that Federal Reserve Chairman Ben Bernanke will continue aggressive monetary easing policies.
Stocks were down mildly through the day, but the 9.8 percent unemployment rate seemed to take a back seat to other issues.
In other words, it was business as usual for a market that has come to rely on the dual hopes of gradual improvements in economic data along with accommodative policy from the central bank—like the Great Oz orchestrating a recovery.
"Markets will interpret this negatively at first. They will focus on the chronic unemployment that is growing more pervasive in the US," David Kotok, chairman and chief investment officer at Cumberland Advisors, wrote in an analysis for clients.
But "financial analysts will realize that this will extend the already 'extended period' of Fed QE for many more months," he added, referring to the central bank's quantitative easing plans. Finally, he noted that "expectations were jerked back to reality today" but that "we remain fully invested in the US stock market."
Investors, indeed, looked to put a bright side on numbers that Paul Dales, US economist at Capital Economics in Toronto, said showed that "economic recovery is going nowhere at a time when companies are unwilling to boost hiring significantly."
Familiar refrains about unemployment being a lagging indicator permeated many analyses, and there were few market pros willing to budge from the notion that while the recovery indeed will be slow, one month's jobless numbers don't equate to the dreaded double-dip back into recession.
"The November reading was as disappointing on the downside as the October number was a surprise to the upside," said Kathy Bostjancic, director for macroeconomic analysis at the Conference Board. "This underscores the Fed's latest decision to engage in more quantitative easing. It supports the notion that further monetary easing was appropriate."
The Fed has just kicked off what many in the market call QE2—a second round of asset purchases, this time worth $600 billion, aimed at injecting money into the system, pushing down interest rates and driving investors into risk assets like stocks.
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For investors who feared that the Fed might succumb to political pressure and curtail its aggressive easing programs, a weak jobs number helps squelch that kind of talk and gives rise to the notion that stocks could head higher or at least hold steady.
"There is huge and growing liquidity with no place to go," Kotok wrote.
The liquidity issue also is likely to be an important one as fund managers head into the end of the year and have to shore up their portfolios to reflect a strong year.
"A lot of the major hedge fund guys and mutual fund guys were positioned in November and came into December with the expectation of getting long the market for the final leg of the year," said Gary Hager, president of Integrated Wealth Management in Edison, N.J. "They did so in robust fashion on Dec. 1. They added a tremendous amount of buying pressure that they didn't fully exercise yet."
That pressure, even independent of hopes for more Fed asset purchases and help from Washington in the form of tax breaks and extended aid to the unemployed, could keep pushing the market higher.
"There's an enormous amount of liquidity and buying pressure that is on top. It's almost like the consumer demand for durable and non-durable items that's been waiting and waiting," Hager said. "As soon as the dam starts to crack a little bit, all of this back pressure is going to flood out with a continual surge of bidding prices higher."
Another school of thought is that the economic data, though not standout, continues to show improving conditions, even if the long-term is less promising.
"The key here is that (the jobs report) does not damage what is otherwise a cluster of improving information and stabilizing financial markets," Kevin Ferry, president of Cronus Futures Management, told CNBC. "We feel that unemployment and this report in particular are to be looked at in terms of volatility and not real economic impact. By the time unemployment is going to become really important it's going to be 2012 and 2013 and we'll be talking about a number that will be far too great for the market to handle."
Finally, technical factors appear to be supportive. The Standard & Poor's 500 [.SPX 1219.80 -1.73 (-0.14%) ] and the Dow Jones industrials [.DJIA 11344.06 -18.35 (-0.16%) ] have survived repeated challenges to their 50-day moving averages, a trend technicians see as significant.
"The bears kept trying to knock the market down but the market wouldn't do it," said Matthew Tuttle, president of Tuttle Wealth Management in White Plains, N.Y. "At the end of the day everybody expects the jobless numbers are bad and are going to be bad for a while. It's a huge issue, but it's almost become old news at this point."