On Friday, the Labor Department reported an increase of 288,000 new jobs. The unemployment rate fell to 6.3%, the lowest in 5 ½ years. At the outset this was good news for the market, but as the day wore on, the Dow Jones Averages started to fade and ended down 45.98 points. What should have been a rip roaring rally fizzled. Some blamed the crisis in Ukraine.
However, when you look underneath all the media news, we see quite a different scenario being played out. Since 2009, the US Federal Reserve has pumped about $4 Trillion dollars into the economy with the proceeds of their bond- buying going to the major banks (when the Fed buys bonds, the proceeds are credited to bank balances.) This created a field day for the bankers who drove the Dow and S & P to new all time highs. Small investors were albeit absent from this surge. In December 2013, then Chairman Ben Bernanke, started tapering bond purchases which were then at $85 billion per month. Incoming Chairperson Janet Yellen has continued the tapering program that is now at $55 billion per month. She has stated that she will end the program by the end of this year, while at the same time keeping interest rates low. What we have had since the start of 2014 is an erratic market with high volatility. The swings, up and down are getting more extreme. On some days, even good news can’t move the market higher. The big players just do not have the firepower they had under the QE stimulus program. With the average investor still on the sidelines, the large bid orders to buy are fewer and fewer.
The Fed is walking a tightrope, hoping that the economy will pick up, giving them room to continue tapering the stimulus program. However even an increase of 288,000 new jobs, in itself, is not enough to kick start the economy in high gear. While the jobs report was strong, other factors are pointing to a sluggish recovery. The percentage of workers now in the workforce is at 62.8%, the lowest since 1978. Most of the jobs being created are in the service sector and construction, both of which are not that stable over the long term. Without a boost in manpower, any recovery will be slow and drawn out. The average work hours are unchanged at 34.5.
The Fed keeps touting low core inflation at 1.2%, however, the consumer is faced with double the core rate for the basics of food, shelter and energy.
Some argue that stocks are over valued at these levels. What we’ll need to keep the rally from stalling is for more good news on the job front combined with stronger earnings going forward. Perhaps there will be a shake out in the coming months. Whether it proves to be just a correction (up to 20%) or the start of a new bear market remains to be seen.