Unemployment is a disaster. Why is the market surprised?

The unemployment rate now stands at 9.8 percent, we learned Friday morning and, to quote Claude Raines in Casablanca, the market was shocked -- shocked! -- by the news, at least initially.

True, that is a brutally painful unemployment figure. To put it in perspective, the nation hasn't had this many folks looking for work in more than 26 years, when Dallas was the most popular show on TV. The so-called jobless recovery is becoming more of a certainty with every passing data point, especially in light of Thursday's flurry of lousy figures that slashed 200 points off the Dow Jones Industrial Average ($INDU). Even worse, it raises the specter of the dreaded double-dip recession.

But come on. Does the market need to start taking Thorazine? After all, you don't need a $1,500-a-month Bloomberg terminal to find out that economists' average forecast is for unemployment to hit 10 percent by the end of the year.
Recall that the market is supposed to be forward looking. It doesn't hate bad news; that can be accounted for. But it despises nasty surprises. So why isn't the truly grim unemployment picture already reflected in equity prices?

"People without a macro investment process are generally shocked by everything," says Keith McCullough, chief executive of Research Edge, a New Haven, Conn., research firm. "For some, it was as shocking to see the S&P 500's peak-to-trough drop of 57 percent as it was to see the 57 percent meltup we've seen since March."

One of McCullough's favorite refrains is that this is not a buy-and-hold market. Rather, it's one where risk and reward need to be carefully recalibrated throughout pretty much each and every trading day. In that context, there is nothing shocking about the latest unemployment numbers, he says. It's really more a product of the "manic media culture created by CNBC" and so much of the financial press. (Um, we plead Not Guilty.)

To be sure, Friday's action could have been much worse. No one really knows why the market does anything on any given day, but it's a good bet that Thursday's pummeling helped mitigate the following day's sell-off.

And, as David Wyss, chief economist at Standard & Poor's, points out, Friday's declines were not totally unwarranted. Wyss is about as dispassionate and data-driven a guy as you can find. He says the scariest part of the report wasn't the unemployment rate -- it was the payrolls data.

Unemployment, you see, is a lagging indicator. It tells us where we have been. Payrolls, as a coincident indicator, are more important, Wyss says, because they provide a snapshot of where we are right now.

Ugh. It ain't pretty. Nonfarm payrolls dropped by 263,000. That's not only much worse than August's reading of a 201,000 decline, but it was also way off estimates, missing by nearly 100,000.

That's got some folks wisely reevaluating how much risk lurks in current share prices, says Brian Sozzi, an analyst with Wall Street Strategies. "Mr. Market is shifting its sights to 2010, and by the evidence of the trading action this week it does not like the lay of the land," Sozzi told clients Friday.

That sounds about right. Perhaps we should even applaud Mr. Market for his resilience on Friday. After all, you don't have to be an economist to know that the phrase "jobless recovery" -- in practical terms, at least -- is kind of a crock. People can't pay their bills and put food on their tables just because GDP stops receding.

Oh, and by the way, the average unemployment forecast for the middle of next year?

It's the same as today: 9.8 percent.

This is how it is. Investors best get used to it.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum