There Are More Lost Jobs Than Newly Created Ones

Last week, on global stock exchanges, the leading indices rose for the second consecutive week, but trading was cautious as investors are uncertain whether the latest macroeconomic data supports the ongoing trend of rising stock prices that has lasted for a year.

On Wall Street last week, the Dow Jones index strengthened by 0.5 percent to 10,624 points, while the S&P 500 index rose by 1 percent to 1,149 points. The Nasdaq index increased by 1.78 percent to 2,367 points. Last Thursday, the S&P 500 index reached its highest level in the last 17 months, but on Friday it slipped lower again as investors are not sure that the macroeconomic data justifies the trend of rising stock prices that has been ongoing since March of last year.

Exactly one year ago, the Dow Jones index plummeted to just 6,547 points due to investor fears of the consequences of recession and financial crisis, marking the lowest level in 12 years. Since then, on March 9 of last year, it has strengthened by more than 4,000 points, or about 62 percent. However, as we enter the second year, the trend of rising stock prices is weakening, as the anemic recovery of the economy does not provide further impetus.

This growth trend was initiated a year ago by good news from the financial sector, and last week this sector was also among the main contributors to the index’s growth. However, analysts say that this is not enough to stimulate the entire market. What could instill optimism in investors is news that more jobs are being created in the economy than are being lost.

"Most of the stock price growth in the past year is based on the expectation of progress in the economy, but that is still lacking. If the economic recovery were on solid ground, I would be convinced by data showing employment growth for two consecutive months and a drop in the unemployment rate below 9 percent. Until then, it is a big question whether the recovery from the recession is self-sustaining or merely supported by government stimulus measures," says Adam Gould, portfolio manager at Direxion Funds.

Month by month, the number of layoffs in the U.S. is decreasing, but there are still more jobs lost than newly created, and the unemployment rate stands at 9.7 percent. In addition to news about improvements in the labor market, analysts believe that a strengthening real estate market would also positively impact Wall Street. They say that investors have so far been very tolerant of the latest data on falling home sales, but if sales do not increase soon, they will become very uncertain.

Good business reports from companies for the first quarter of this year would also positively affect the market. The season for releasing these reports begins next month, and investors hope that the results will show growth in revenue and sales for companies, which would mean that American consumer spending is increasing. However, even if macroeconomic data and business results improve, analysts say it will be difficult to maintain the gains from last year.

Historically, after some of the largest jumps in the market, a sharp drop in prices has followed. In the first year of the ‘bull market’ from 1982 to 1987, the S&P 500 index jumped 58 percent, only to fall more than 14 percent the following year. There have also been contrary examples. For instance, the S&P index rose more than 26 percent in 2003, and the following year gained an additional 10.7 percent. Regardless, the Dow Jones index is currently about 62 percent higher than it was a year ago, while it is up approximately 1.5 percent compared to the beginning of this year.

That investors are cautious is also indicated by the thin trading volume. Last week on Wall Street, the American Stock Exchange, and Nasdaq, the daily trading volume ranged between 8 and 8.4 billion shares, while last year the daily average was 9.65 billion.

"The thin trading volume shows that investors are not entirely convinced that further increases in stock prices are justified. It seems to me that we have reached a point of fair value for stocks," says David Joy, strategist at RiverSource Investments.

European exchanges also traded cautiously last week. The London FTSE index rose by 0.4 percent to 5,625 points. The Frankfurt DAX increased by 1.1 percent to 5,945 points, while the Paris CAC index rose by 0.4 percent to 3,927 points. On the Tokyo Stock Exchange, the Nikkei index jumped 3.7 percent last week to 10,751 points, the highest level in seven weeks. (H)