The fine art of guessing monthly employment data is a big business on Wall Street. Economists fine tune their forecasts every month and rarely miss the actual number by more than a few thousand jobs. Not this time.
The economy gained 204,000 jobs in October—almost double the consensus forecast. Hiring in August and September were also revised upward by a total of 60,000 jobs, according to the Labor Department. The Street was braced for bad news, considering that the government shutdown last month had furloughed over 800,000 government workers.
The stock market roared higher on Friday’s open as a result of that news, while interest rates also climbed. Stronger employment, so the reasoning goes, should mean stronger growth in the economy. It might also mean that the Fed may taper sooner than expected, thus the spike in interest rates.
All of the above is simply the short-term excuse for this week’s volatility. We seem to be developing a trading range in the markets with the bottom somewhere around 1,740 in the S&P 500 Index while the top appears to be 1,775. Over the last few days we have experienced close to both the highs and the lows of this range. A consolidation period like this is to be expected given the 130 point rally we have experienced in the S&P 500 from the October lows.
I fully expect that once the euphoria of last month’s job gains wear off, renewed worries over the extent and timing of the Fed taper will resurface. After all, the media has to have something for you to worry about. How else are they going to sell advertising? What they won’t say is that there is no way the Fed will taper with the holidays approaching. The last thing they need is a slowdown in consumer spending right now. Nor does it make much sense for a taper to happen in January or February either since the transition in leadership from Chairman Ben Bernanke to Chairwoman Janet Yellen will occur at that time. But that won’t stop the pundits from spinning yet another wall of worry. If it weren’t so sad, Wall Street’s antics would be positively hilarious.
As traders buy and sell at every little shift in sentiment, I say pay attention to what counts. Overseas, the European Central Bank just cut interest rates again and is prepared to cut further if need be. The EU is coming out of recession but growth is still too slow, thus the ECB’s additional easing. But for the high frequency and day traders, it was another classic “sell on the news” scenario engineered by short-term speculation. Both European and U.S. markets declined over one percent on heavy volume. Friday we recaptured most of that loss.
Then, of course, there are the talks with Iran that the markets are choosing to ignore. All indications are that after several years of global concern over that country’s developing nuclear capabilities a peaceful solution is at hand. An agreement should help to reduce oil prices on lessening Middle East tensions, which in turn is good for global economic growth.
Bottom line: ignore the day-to-day trading. Resist those who want you to follow them in and out of the market. The truth is that active traders do not have deep pockets. They can trigger a sell-off but can’t maintain it. Their selling quickly fizzles out unless the herd (you and me) follow them. Without big money behind them, the bears can’t do more than cause a few days of inconvenience.
The truth is that most owners of equity are not selling. Call us complacent, call us starry-eyed optimists, but the facts are that everyone who sold this market on some real or imagined fear this year has lived to regret it. As long as we remain strong in our resolve to hold our positions, the sellers can’t start a stampede, which means that there is a solid level of support under this market and that level continues to move higher.