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Unemployment Falls, Stocks Surge

But is it Sustainable?

Written by Briton Ryle
Posted March 11, 2013

It seems like a very nice present was delivered last Friday in some really upbeat economic figures. But after pulling on the bow and opening the box—well, it appears the wrapping out-glistened the gift inside.

It’s a classic “Hey!” and “Yeah, but…” pro/con tug-of-war.

• Hey!… New jobs for the month of February beat even the highest of expectations as 236,000 new employees were added to payrolls. This was well above the anticipated 160,000, and better than the recent 3-month average of 190,000.

CNNMoney elaborates:

“Solid hiring came from a wide range of industries, including restaurants and bars, doctor's offices and hospitals, professional and technical services, and manufacturers.

“’That's what we like to see to tell us the recovery is broadening out,’ said Beata Caranci, vice president and deputy chief economist at TD Economics.”

• Yeah, but… December and January job numbers were revised down 15,000. Employment is still 3 million jobs below its pre-2008-crisis level.

Adds CNNMoney, “Overall, the U.S. economy has only gained about two thirds of the jobs lost in the financial crisis. Meanwhile, the population has grown...” Hence, greater than 3 million more jobs are required to restore that previous employment coverage.

“It's a first step down a long road before … seeing a substantial improvement in labor market conditions,” Yahoo! Finance quotes Bank of America Merrill Lynch senior economist Michael Hanson. “They will want to see 200,000 job growth, not just in one month, but several months in a row.”

• Hey!... The unemployment rate fell to 7.7%. “Factory jobs increased 14,000 last month after rising 12,000 in January,” reported Yahoo! Finance. “Retail employment increased by 23,700 jobs, an eighth straight monthly gain that defied a recent slowdown in sales.”

Construction outperformed all the rest, adding 48,000 new jobs—the most since March 2007 and almost double January’s 25,000. “This sector single-handedly accounted for a quarter of the 8.8 million jobs lost in the financial crisis,” CNNMoney recounts. “Momentum there is a welcome sign that the economy is improving, said Sal Guatieri, senior economist with BMO Capital Markets.”

• Yeah, but… The unemployment rate fell in large part due to 130,000 people who simply stopped looking for work.

What’s more, 12 million workers are still unemployed, and for longer periods of time, as CNNMoney points out, “About 40% of the unemployed have been without a job for at least six months. The average length of unemployment now lasts nine months.”

The report also draws attention to the disproportionate spread of unemployment. “At 13.8%, the unemployment rate is highest for African Americans. Young people are also struggling. Workers ages 20 to 24 had a 13.1% unemployment rate in February, and for teenagers ages 16 to 19, it was 25.1%. Education still makes a big difference. The unemployment rate was only 3.8% for workers over the age of 25 with bachelor's degrees, whereas it was 11.2% for high school dropouts.”

• Hey!... “Average hourly earnings rose four cents last month. That was the fourth straight monthly gain,“ Yahoo! Finance informs. “Earnings were up 2.1 percent in the 12 months through February, rising by the same margin for a third month in a row.

“’This provides a significant offset to the multitude of headwinds plaguing the consumer in the first quarter and suggests spending could do a bit better than anticipated,’ said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.”

“Adding to the stream of encouraging data,” Reuters picks up, “was a 1.2 percent gain in U.S. wholesale inventories in January to $504.4 billion - the fastest pace of growth since December 2011. The strong reading followed a revised 0.1 percent rise in December 2012.”

As a result of all these positives, stock markets continued to climb. Major indices surged upward, with the Dow setting its fourth consecutive new all-time high. This year is only 3 months old, and already the Dow is up almost 10% and the S&P 500 is up almost 9%.

“We're seeing growing inflows coming into the asset class,” David Thebault, head of quantitative sales trading at Global Equities in Paris, relates to Reuters. “This is sort of a sweet spot, with improving U.S. job data while central banks around the world are pledging to keep printing money.”

• Yeah, but… “Despite the strong market reaction,” Reuters tempers, “last month's labor report showed a job market that continues to move sideways at a frustratingly slow trend for the Fed, said Ellen Zentner, senior U.S. economist at Nomura Securities in New York. The length of time people are unemployed deteriorated, the number of discouraged workers increased, voluntary job labor fell and the labor force participation rate declined, all items Fed policymakers pay close attention to, she said.

“’This is not a report that is going to inspire any kind of change in monetary policy, it is certainly not going to inspire any kind of discussion around this stellar job report that makes them decide to end QE earlier than expected,’ Zentner said, referring to the Fed's asset-buying program.”

The Federal Reserve has consistently stressed—which Chairman Bernanke most recently reiterated at his February 25th hearing before the House Financial Services Committee—that the Fed will not change its current policy as long as the unemployment rate remains above 6.5% and inflation is projected to be no more than 2.5%.

Currently, the unemployment rate is 7.7% and the yield on the 10-year note—which might be considered a measure of anticipated future inflation—closed at only 2.04% on Friday.

In an interview with Bloomberg Surveillance, as transcribed by Bloomberg, Pacific Investment Management founder Bill Gross opines that members of the Federal Reserve “have made it obvious that even if unemployment gets to 6.5 percent, they are going to look around. They are going to look at the participation rate, they are going to look at the work rate, they are going to look at productivity.”

“The participation rate,” explains Bloomberg, “which shows the share of working-age people in the labor force, fell to 63.5 percent last month, matching the lowest since September 1981, from 63.6 percent.”

As long as the Fed keeps adding money to the bonfire, the stock market will remain on fire, rising ever higher. Sights are already being set on Dow Jones 15,000, and S&P 500 1,600 before the end of 2013. (CNBC - Subramanian, CNBC - Birinyi, Bloomberg interviews.)

Others, though, are calling the equities fire too hot to handle, cautioning investors to stay well clear to avoid being burned by an over-due market meltdown—Nouriel Roubini, the infamously nicknamed “Doctor Doom”, in particular.

Citing recent interviews with CNBC last Friday and Bloomberg last week, MarketWatch reported that Roubini believes “investors should prepare for disappointment later this year”, that “a bigger economic bubble [is] coming in 2013 than 2004”, and that “the market is going to be surprised by how much the U.S. is going to slow down”.

So where should investors put their money? Will Fed policy continue to fuel the red-hot equity market? Or is it too late to chase these markets? And what of the potential for a major correction? Keep reading Wealth Daily for insights into these and other timely investment subjects.

Joseph Cafariello

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