It's All On Jobs Now

A: So we have had our fair share of failed auctions, margin calls, financial write-downs, fiscal & monetary stimulus, gov't sponsored targeted programs, and private sector bailout injections. It's exhausting. But the one thing we have not had yet, thankfully, is a rapidly deteriorating jobs market; but the radar is up. Of course its logical to expect it given the environment we have been in for over 8 months now, but the reports are always lagging and usually revised at a later time. To me, Friday's jobs report is going to be a big market mover IF the number beats or misses expectations by any significant amount. It's all on jobs now.

Jobs reports could be the final nail in the coffin for recession talk. If the unemployment rate unexpectedly jumps to 5.2% or higher, current expectations call for a 5% rate of unemployment, you are going to hear the media go nuts with 'recession is here' articles & the markets react fairly negatively; the combination of these two forces will hit consumer confidence in a way that just doesn't bode well for future economic reports. The messed up thing about following leading indicators is that we will see worsening economic data for a period of time AFTER the leading indicators normalize.

Here is a chart of unemployment rate since 1998, courtesy of the BLS. After the dot com bust, corporations cut back on spending and jobs ultimately bringing the unemployment rate to a high of 6.3% in June of 2003. That was about 3 years AFTER the top of the dot com bubble (back in early 2000), as the jobs reports lagged the stock markets and rapidly deteriorated from mid 2001 to mid 2003. Looking at the how the housing market, credit markets, and financial institutions have been performing over the past 8 months or so it is hard to argue that employment will be pressured. Unfortunately, this blogger expects some sharp upward pressure on the unemployment rate in the months ahead.

Lets play a bit and compare stocks to the unemployment rate since 1998, and see if we can see the relationship. The chart below compares the DOW vs UNEMPLOYMENT RATE over the past 10 years:

When I view this, I see a few things:

a) when unemployment really started accelerating in mid 2001, stocks corrected sharply.

b) in early 2003, stocks bottomed before unemployment topped out in mid 2003. For the record, the fed aggressively lowered the FFR to a low of 1% in June of 2003; about when unemployment topped out! Stocks started rallying 2 YEARS AFTER THE FED STARTED CUTTING RATES AND 6 MONTHS BEFORE THE LAST RATE CUT!When the fed started hiking interest rates (JUNE 2004 --> June 2006), stocks rallied about 20% during that period.

c) Unemployment has been slowly ticking higher since the low in early 2007; since unemployment is lagging, eyes MUST be on jobs now and probably for the next 3-4 quarters to see the reaction to the distress we have experienced thus far

On Friday we will get the unemployment rate and expectations are for 5%; the last report was 4.9%. What I don't know is which unemployment report (this one, or a report yet to come) will confirm what the fed is telling us when they say, "unemployment is expected to rise". The reason this is so important is the secondary effect it has on the consumer and on corporate strategy; as unemployment rises, confidence falls and the consumer gets more conservative while corporations cutback investments and look to cut costs contributing to the cycle.

ADD-ON (10:53AM): Forgot Non-Farm Payrolls on Friday too. Market expects growth of 25,000.

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