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MarksJarvis: Weak jobs report a mixed bag

Disappointing figures show economy limping along; resulting S&P 500 record a sweet treat for investors

Gail MarksJarvis

October 23, 2013

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If you are an investor, you don't have to wait until Halloween to get your fill of candy.

The Federal Reserve is going to keep throwing massive quantities of treats at you this month and maybe through next spring without any letup. At least, that's what investors concluded after a disappointing jobs report was released Tuesday. Their expectation is that all those treats from the Fed will keep investors sweet on stocks for a while even though millions of Americans are still struggling to find jobs and the economy continues to climb with a limp.

While that might seem to defy logic among people who think stocks rise when the economy is vibrant or on the verge of vibrancy, the Standard & Poor's 500 closed at a record 1,754.67 on Tuesday — not because the economy looked strong, but rather because the economy can't shake the blahs.

The latest jobs report released by the government showed job creation far below investor expectations. In September, a disappointing 148,000 jobs were created. Economists had been expecting 180,000 and generally agree that for the economy to start moving strongly ahead, it needs 200,000 new jobs a month. Further, October data are likely to be even worse when released in November, because they will include people out of work during the partial government shutdown. Tuesday's data preceded the shutdown.

The economy had been creating 200,000 jobs a month early in the year, leading analysts to predict a strong end to 2013 for the economy and stock market, and an even stronger 2014. Now, with job creation slumping over the last three months, analysts continue to have lofty expectations for the stock market, but they've altered their rationale for that outcome. Now, many think the stock market will continue to climb because investors can't resist the gift of stimulus from the Federal Reserve.

"Today's release of September's employment report is abysmal," said Cumberland Advisors Chief Investment Officer David Kotok. That "abysmal" report "further extends the Fed's tapering time zone."

Tuesday's employment report is "soft all round," said Ian Shepherdson of Pantheon Macroeconomics. "Tapering in this year is off the agenda."

Jan Hatzius, economist for Goldman Sachs, said it's possible tapering could begin in December, but with the jobs data "weaker than expected" and uncertainty over Congress' budget debate in January and February, he thinks March is more likely.

Besides disappointment with payroll growth, Hatzius told clients that "average hourly earnings grew more slowly than expected."

Five years after the start of the financial crisis, there are doubts that the Fed's bond-buying stimulus will do much to help employment. Analysts credit the Fed with pushing the stock market up by keeping interest rates low, and they note that gains in the stock market do make people with stocks feel wealthier. But they question the extent of the impact on job creation or wage growth.

"One of the ways the Fed has tried to ignite growth is to try to goose up stock prices or real estate to create a wealth effect," said Ned Davis of Ned Davis Research. But he told clients in a recent report that he's not sure that has stimulated growth, and "some people argue that all the zero interest rates on cash have done is to push stocks up into bubble territory."

Kotok says stocks are not overpriced for the current environment. With interest rates low and profits strong, he said, he expects stocks to continue climbing. He assumes investors will keep putting money into stocks because low interest rates make bonds an unattractive alternative.

"Private sector employment was ugly in September," he said. "But there is a sound rationale behind the rising market."

Thomas Lee, strategist for JPMorgan, also thinks investors can expect a rising market. He told clients last week that as mutual fund managers start approaching the end of the year, he expects them to "add risk" to their portfolios to harness strong year-end gains.

But beyond that behavior, he said, third-quarter earnings season shows "fundamentals remain solid." Cyclical stocks, which depend on a strengthening economy, he said, should be bolstered because there is pent-up demand in the U.S. for housing and cars, and a manufacturing lift in Europe.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis