Printer Friendly Version      Email this Article

                                            Freaky Friday                                           
Ugly Jobs Report Paints Beautiful Picture?

By Brady Willett
If there was ever a day that typified 'new economy' thinking that day was today (Friday): there is no such thing as bad news when the investing populace looks only to the future.

In April 223,000 workers lost their jobs, and the unemployment rate ticked up to 4.5% - both of these numbers were considerably worse than expectations. As expected, the markets reacted to the downside following the dismal news.  However, shortly before 10:00 AM, with the Nasdaq off 2.7%, and the Dow off by more than 100 points, buyers stepped in.  Suffice it to say, those buyers did not step away from the table until the markets closed. 

The Dow gained 154 points on over 1 billion shares traded, and the Nasdaq tacked on 45 on over 2 billion. Advancing stocks doubled decliners on the NYSE, and breadth was 22-15 positive on the Nasdaq. The VIX struck a high of 30.72 before drifting back to 27.72, and the p/c ratio closed at 0.67, after closing at 0.72 in the previous session.

Here Comes The Fed

What the negative jobs report did was confirm, beyond a shadow of a doubt, that the Fed will cut interest rates on, or before, the FOMC meeting on May 15.  Perhaps more importantly, the jobs report hardened the belief that this economy will soon turn around because the historical parallels are now backing the bull.  As an example, on the front page of Bloomberg on Friday an article read "Stocks in U.S. Gain as Jobs Report Fails to Dent Profit Optimism."  Within the article read:

"During the last recession, the economy bottomed in the fourth quarter of 1990, when U.S. gross domestic product fell by 3.2 percent. Unemployment didn't peak until June 1992, when the jobless rate touched 7.8 percent.
In the 18 months from the bottom of the recession through the peak of unemployment, the S&P 500 posted an annualized return of 19 percent."

It is these types of historical accounts that fuel the popular adages such as 'don't fight the Fed', 'buy the dips', and 'hold for the long term'.  In sum, the belief that the 'worst is over' was present last Monday, and remained the overriding theme until Friday. As for the Bloomberg perspective, the comparisons to today are chosen carefully.

In 4Q90 the average P/E on the S&P 500 was 15, less than 20% of the American population was in stocks, the American consumer was saving, and business were paying down debt.  Today the average P/E on the S&P 500 is over 20, more than 50% of the American population is in stocks, the consumer is not saving, and businesses, up until recently, were borrowing at a record clip.

The above comparison is a rather crude, but effective way of saying that this is not 1990.  Another quote that illustrates the difference between the current market, and previous periods reads:

"...the S&P 500 (is) selling at 27 times estimated 2001 earnings and the top 25 Nasdaq stocks at 50 times,...At the last eight bear market bottoms the S&P 500 sold at an average of 11 times earnings."  Comstock - May 4

"Job report paves way for Fed to slash rates again" CBS MarketWatch
In all probability the Fed will hack interest rates lower come May 15.  As Mr. Kellner concludes this represents a bullish scenario for stocks:

"This would make it five cuts in a row within 12 months -- something that has happened only four times before. Each time -- without exception -- the stock market has rallied in the ensuing 12 months, with gains ranging from 4.5 percent to more than 50 percent." Irwin Kellner

You may remember that a 2% reading in first quarter GDP on April 27 sparked a wave of optimism.  By contrast, yesterday the White House said "It is entirely possible that the 2% growth rate will be revised downward," – this sparked yet another wave of optimism. Such is the landscape today: good news is good, and bad news is good.  Why: Because Greenspan, and history are in charge.

Perhaps the only argument the bears have left is that this economy, and stock market have done things that none have done before.  As such, does Fed intervention always have the same systemic effect on the economy, and markets?  When looking at select historical accounts, and current investor perceptions we can conclude one thing: we will find out within the next 12 months.

May 11, 2001



http://www.fallstreet.com