Investors Should Pay No Mind to Jobs Numbers! January 9, 2009

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Sy Harding

On Friday, the Labor Department released its employment report for December.

You’re no doubt already aware of the data; 524,000 more jobs were lost in December, making for a total of 2.6 million lost in 2008. The losses have been accelerating, with 1.9 million jobs lost in just the last four months. The unemployment rate rose from 6.5% in November to 7.2% in December.

The comparisons being made are bleak. For instance, it’s being pointed out that the 2.6 million jobs lost in 2008 were the most since World War II ended in 1945, when servicemen returned from the war and defense plants were closed. The loss of 524,000 jobs in December was the worst monthly loss since 602,000 jobs were lost in December, 1974, since 629,000 were lost in July, 1956, since 834,000 were lost in October, 1949, and since a huge 2,000,000 jobs were lost in September, 1945.

The December report showed job losses spread across the economic spectrum; construction, financial services, manufacturing, retail, etc. The only exceptions were healthcare, education, and of course government, which collectively added 52,000 employees in December.

The additional large loss of jobs in December certainly supports current expectations that the recession, which saw GDP negative by 0.5% in the 4th quarter of last year, will worsen to a hugely negative 5% or more decline in GDP in the 1st quarter of this year.

So if you’re worried about losing your job you may have reason to do so.

But if you are using the jobs numbers to determine what is likely to happen with the stock market, fagetabout it.

Not only can you not time the stock market by looking out the side window at what current conditions are (since the stock market looks ahead six to nine months), but of all the current conditions that are useless in that regard, the employment picture is one of the most useless.

Meanwhile, comparisons to the number of jobs lost in previous periods, particularly to the 1940’s and 1950’s are misleading and fear-mongering. The population and labor force were considerably smaller then, so similar job loss numbers in those decades represented a much larger percentage of the work force.

The loss of jobs in the current cycle, as bad as they sound and have been, has only returned the labor force to its level of February, 2006, a level of employment that had the economy humming along quite nicely thank you.

However, more importantly, the employment picture is not the place to look for early signs of the economy bottoming anyway. Employment is a lagging condition in both directions. Remember how employment remained strong right through last summer, which had economists (and the Fed) saying there would be no recession because employment remained strong, even though as we now know, the recession had begun in December, 2007.

In the other direction, as always the stock market (which always looks ahead six to nine months) will have already recovered significantly before the recession bottoms and the economy begins to recover. And the economy will have already recovered significantly before employment will begin to pick up again.

But as always, investors and TV analysts worry a lot about the employment numbers, not only legitimately about what they are saying about the economy, but uselessly what the jobs numbers are saying about the stock market going forward.

For instance, let’s go back and see how the stock market fared after the previous terrible monthly job losses to which the December numbers are being compared.

When that horrible report of September, 1945 was that 2 million jobs had been lost, the stock market had already bottomed in 1944, and was up 35%. After the jobs report it added another 17% over the next five months. When the terrible report in October, 1949 was that 834,000 jobs had been lost that month, the stock market had already bottomed in June and was up 12% when the report came out, and then added another 22% over the next seven months. When the terrible report came out in December, 1974 that 602,000 jobs had been lost that month, the stock market bottomed three days later, and the Dow gained 53% over the next ten months.

By all means market-timing is going to continue to be important if you are to make, and keep, profits from the market. But the jobs picture has no place in timing the stock market.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding the Bear – How To Prosper In the Coming Bear Market. His new book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!