In 2010, What Will Move the Markets?

I have been thinking about this post all week in anticipation of the much-hyped monthly employment report. As it turns out, the report, which came out on Friday, is not such a big deal after all. Yes, unemployment is a big deal for those who are unemployed, and, yes, employment or lack thereof is an important gauge of the economy’s health, and yes, the employment numbers can have a powerful influence on the markets. So why am I saying the report that came out on Friday is not such a big deal after all? The answer is simple; the markets do not see it as a big deal, and since we are in the game of trading markets, we should listen to what the markets are telling us …

The last two years in the markets are gone. Forget about them. It is time to move on. The days of massive unemployment numbers dragging all the markets down are over. True, unemployment will continue to mark the lack of a full recovery, but the trend since November indicates the economy, although still anemic, is getting better, and that is what the markets have waited to hear. And now the markets are telling us that the picture is bigger than the employment numbers, that other elements in the picture are equally important in determining the shape and form of what is to come. An assessment from the World Daily Market Bulletin is worth looking at to understand the point

The major averages are on opposite sides of the unchanged mark for yet another session, struggling to find consistent direction. Initial weakness in the markets came on the heels of a report from the Labor Department, which showed that non-farm payrolls declined by 85,000 in December, a sharper drop than economists had anticipated.

The key phrases here are “unchanged … for yet another session,” “initial weakness,” and “struggling to find consistent direction.” All week, pundits and analysts have been saying the markets are waiting for the employment report that comes out on Friday. They have been telling us that the tepid movement in the markets is about uncertainty—would the report show a positive or negative number? Well, Friday came and the report showed the economy lost more jobs than expected and the three major indices plunged on the news. At the end of the day, however, all three indices pared the big losses and found their way back to positive territory.

If a slow rebound in employment is now “baked” into the pie, so to speak, which indicators turning positive will spur the markets into a solid bull run? Some key ones need watching. For example, the wholesale-inventory data and business spending seem to have offset the employment data of Friday. More from the World Daily Market Bulletin …

The Commerce Department revealed that wholesale inventories jumped 1.5 percent in November, following a 0.2 percent drop in the previous month. The figure came as a surprise to economists, who had expected a mild decline. The data also showed that wholesale sales rose by 3.3 percent, far higher than economists had predicted.

If positive, such indicators as manufacturing data, housing data, consumer confidence, and, ultimately, consumer spending will offset the ongoing weak employment data, but which one indicator going positive in these times of uncertainty will create a level of certainty that will allow for a sustained bull run? Perhaps not one but two indicators will determine which way the markets go in the near term. The first is the Federal Reserve. How does the Board of Governors view the economy? What will it do with interest rates and a weak dollar? Is inflation an issue? How will it exit its comprehensive and expensive strategy to save the financial sector, to hold down mortgage rates, and to provide cheap money and liquidity to a feeble economy? When the these questions are answered to a degree of certainty, the markets will respond forcefully. The second is corporate earnings. If the 2009, Q4 earnings demonstrate that business is actually showing good margins and profit form something other than cost cutting, the markets will respond forcefully. If the Federal Reserve and business earnings can remove uncertainty from the market, then the unemployment data, although important, will play second fiddle in the orchestration of a bull run. In fact, if the two indicators above turn certainly positive, employment will get a solo in the composition of the economic recovery.

 Best Wishes,

Lou Mendelsohn