Friday, August 04, 2006


Market sentiment

Today was an interesting day in the market. The unemployment number came out worse than expected.

Gripped by caution, employers slowed hiring in July, pushing the nation's unemployment rate to a five-month high and putting pressure on the Federal Reserve to take its foot off the economic brakes.

The Labor Department reported Friday that employers added just 113,000 new jobs in July, down from 124,000 in June the latest in a string of mediocre job gains in recent months.

With companies wary of increasing work forces in a slowing economy, the civilian unemployment rate jumped from 4.6 percent in June to 4.8 percent, matching the rate of last February. The last time the jobless rate was higher was in December, at 4.9 percent.

(Expectations are all that matter. The consensus view of what the percentage of unemployment and what is known as non-farm payrolls is the target.) The way the market reacts gives insight into the state of the market's mind. Ironically, I was talking with Bill O about this this past week.

There are two, obviously, directions the market could have moved. Stocks rallying would mean that the dominant psychology is prevailing. That is all bad economic news means the Fed will stop raising interest rates. A market driven by this psychology doesn't care about the state of the economy. The only concern is alternative investments like bonds and whether they will attract money from stocks. Bad news means the Fed will rethink is interest rate policy.

Well the market rallied then dropped. What does it mean. I'll tell you next week. What I can tell you is that the idea that bad economic news is good for the stock market will eventually be rethought. What is certain now is that we are moving towards recession. More later.

P.S. Did you notice the wording in the above quote, "Gripped by caution..."? I can imagine being gripped by terror, fear, horror but caution seems like a state of mind that would not 'grip' me.


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