Earlier this month the Bureau of Labor Statistics (BLS) released
an employment report that was the latest in a series of
mediocre economic news
. In contrast, the stock market has begun 2013 as if happy days are
here again. Which do you want to believe?
Employment growth stumbles
The BLS report showed 157,000 new jobs in January. This was
disappointing -- think of 200,000 as an informal benchmark for
decent monthly job growth, and with the fiscal cliff out of the
way, many had hoped 2013 would get off to a stronger start.
Some of the sting was taken out of this number by strong upward
revisions to the job gains for November and December, but viewing
these months together with the latest figure only highlights how
much things seem to have slowed down in January.
Making sense of the stock market
The S&P 500 Index gained over 5 percent in January, a
roaring start for a lackluster economic environment. Why the
disconnect between investor behavior and the big-picture economic
data? Here are four possible reasons:
Revenues are truly improving.
It is possible that individual companies are starting to see
improved sales, and these haven't yet translated this into hiring
plans and wage increases. The optimistic case would be that as
companies gain confidence from their sales figures, they'll plow
some of their earnings back into expansion plans. That
reinvestment could make growth more sustainable.
Earnings are improving due to spending cuts.
While companies are reporting earnings growth, this is not always
necessarily due to top-line revenue growth. Spending cuts can
help a company make its earnings forecast for a quarter or two,
but this does not represent true growth in the business.
Investors lack alternatives.
CD, savings, and money market rates are languishing below 1
percent. Bond yields are around 2 percent. For investors who need
better returns than that, there is little alternative than to try
stocks. Low interest rates increase demand for stocks, but rising
demand does not make the companies investors are buying any more
valuable. Ultimately, there are limits to what demand alone will
do for the stock market, and just because investors need better
returns than they get on interest rates
doesn't mean the stock market will come through
Investors are chasing a bull market.
What's going on may not be as rational as any as the three
explanations above. When investors get a whiff of a bull market,
they don't need good reasons -- they just start
chasing the market
. January's rally was accompanied by the kind of giddy
prognostications that often spell trouble in the end.
Those with money in the stock market can enjoy its strong start
to 2013, though they had better hope some improved economic
fundamentals come along to support the rise in prices. As for
depositors in savings accounts, until those improved fundamentals
come along, they are no closer to seeing higher rates than they
were a year ago.