The just-released jobs number — 162,000 jobs added in July, with the unemployment rate ticking down to 7.4% — are a mixed bag, and futures are a bit softer as a result.
Meanwhile, the “quit rate” — that is, the amount of people leaving work voluntarily instead of being laid off — is on the rise. And to top it all off, Challenger Gray & Christmas estimates plans for layoffs are easing.
That’s a very strong outlook for jobs, no doubt.
Too bad it doesn’t say squat about stocks.
To wit: Unemployment just nudged down to 7.4% after being stuck between 7.9% and 7.5% since September 2012. But in the past year, the stock market has jumped about 25%.
Bears would argue that this is a case of overly optimistic investors pricing in a recovery that is tenuous at best, and that a correction is due because the rally isn’t based on substance. Bulls would counter that continued improvement, albeit slow improvement, has fueled the rally and that the direction of the job numbers is much more important than the magnitude of the gains.
But both are oversimplifications of why Wall Street moves the way it does.
The connection between stocks and the labor market is tenuous at best, and while the American consumer is indeed a powerful economic force, it’s not the only one — and it’s often not the best one to move stock markets.
After all, stocks have been blowing up in the last year – and longer-term, have raced up about 150% from the March 2009 lows. This despite sluggish job growth, disappointing GDP and other nefarious data points that always have the permabears frothing at the mouth.
There is very little correlation between the stock market and the broader economy. Stocks can go up in “bad” times and down in “good” times. And that’s just the way it is.
Consider China, which will see GDP growth above 7% this year but has seen its stock market drop about 12% as measured by the SSE index. Or take Germany, which will be lucky to finish 2013 with any GDP growth at all, but has seen a rally of about 9% in the DAX index this year.
Many well-meaning pundits talk about U.S. economic data as they relate to U.S. stocks — but in truth, it’s largely just an academic exercise.
And undoubtedly we’ll see the same horseraces run again over the weekend based on the latest jobs data.
But investors need to focus on what really matters, and that’s earnings growth and valuations based on future profits. Stocks certainly don’t rise and fall based on these numbers alone, but they are a heck of a lot more indicative of winners and losers than some headline jobs number that is only a smidge different than it was a month ago or the month before that.
That’s not to say that economic data is meaningless. There are important trends to glean based on manufacturing data and consumer confidence — and, yes, even unemployment figures. But always keep in mind that these data must ultimately be connected to corporate profitability and growth in order to matter on Wall Street.
And frankly, a little downtick in the headline unemployment rate isn’t all that meaningful … whether stocks are at new highs or not.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.