Office Depot (ODP) is the owner of OfficeMax and Office Depot store brands, and one of the largest s...
What Today's Market May Tell Us
12/04/2009 1:00 pm EST
If stocks don’t soar today—and they were up slightly early this afternoon—investors will need to rethink their explanation for recent market weakness.
This morning, the Bureau of Labor Statistics announced that the economy lost just 11,000 jobs in November. That was a huge surprise: Wall Street had been expecting a loss of 125,000 jobs.
The good news in the numbers didn’t stop there, though.
The average workweek picked up to 33.2 hours from 33.0 hours in October and the average workweek in manufacturing went to 40.4 hours from 40.1 in October. The economy may not be generating full-time jobs yet, but it did add 52,000 temporary jobs in November. That’s a huge positive step for the economy since employers typically add temporary workers before hiring full-time help.
All this should be enough to decisively push stock market indexes through the highs where they’ve been stuck since the middle of the month. The Standard & Poor’s 500 stock index, for example, closed at 1110 on November 17, at 1111 on November 25, and at 1109 on December 1.
The failure to decisively break above 1110 and move on to new highs has fed into fears that the rally that began in March has finally topped out.
The consensus explanation from what I hear the talking heads saying is that this failure to break through the 1110 level on the S&P 500 is a result of nervousness about the health of the recovery and prospects for the economy.
If that’s so, today’s numbers should pretty much put an end to that case of nerves. Official unemployment actually dropped to 10% in today’s report from 10.2%. And even the full unemployment number, which includes discouraged workers and those working part-time jobs but who want full-time work, fell to 17.2% from 17.5%.
With the huge surprise of an expected 125,000-job loss turning into a loss of just 11,000 jobs, stocks should, finally, have no trouble breaking through and closing above 1110 by a significant margin.
If, that is, nervousness about the economy is the real reason that US stocks have stalled.
I’ve been arguing for months now that explanations of this stock market that focus on the rate at which the economy is recovering are catching only half the story. At the most.
Fundamentals like economic growth that will turn into fundamentals like corporate earnings are less important to stock prices right now, I’ve argued, than increases in global cash flows. More money sloshing around the world has meant more money that can go into assets from condominium developments in Shanghai to mining stocks in Australia to energy stocks in the United States.
That cash came from two sources. First, the huge stimulus programs launched by governments around the world to end the financial crisis and revive economies. Second, the dollar carry trade that allowed traders to borrow US dollars at very cheap interest rates and then invest them in better-paying assets, such as Chinese real estate, Australian mining stocks, and US energy stocks.
If you think about those global cash flows, good economic news is a very mixed bag. The quicker the recovery in national economies, the more quickly central banks and national governments will act to remove monetary stimulus from their economies.
Australia, for example, has raised interest rates for three straight months, most recently to 3.75% on December 1. India looks like it will raise interest rates before the end of its fiscal year on March 31, 2010. The European Central Bank has started to remove cash from the European economy by cutting back its lending programs to banks. That looks like preparation for an increase in interest rates above the current 1% some time in early 2010.
The big question, of course, is the Federal Reserve. The Fed has said repeatedly that it intends to keep rates low for an “extended” period of time, but a falling unemployment rate would rapidly shrink that extended period, since every economist knows that unemployment is a lagging indicator. If unemployment is dropping, then the economy is certainly on a growth path. (For my take on why Wall Street could wind up being disappointed by growth in 2010, see this recent post)
A stronger US economy and increased prospects of US interest rate increases would also produce, at least for a while, a stronger US dollar. That would lead traders to start to repay their dollar loans, because no one wants to get stuck repaying those loans in more expensive dollars. The only way to repay those loans, of course, is to sell the assets bought with those dollars.
So, the stock market faces a situation where, yes, good economic news is good for the economy and corporate earnings, but where, no, good economic news is not good for global cash flows.
Investors will be able to tell a lot about the balance of power between economics and cash flows from today’s reaction to the good news on unemployment.
If the S&P 500 doesn’t close decisively above 1110 today, then we’ll know that cash flows continue to trump good economic news.
At noon today, the S&P 500 was up a piddling two points to stand at 1102.
Full disclosure: Jim Jubak does not own or control shares in any stock mentioned in this post.