Market Commentary

Stocks were volatile again yesterday.
May 12, 2010

Stocks were volatile again yesterday.  There were several over riding themes influencing trading such as the European debt crisis, trading issues and upbeat economic data.  I would like to focus on the latter for I believe growth will trump the other issues.

Wholesale inventories rose less than the consensus view thus suggesting first quarter GDP could be revised about 0.04% higher.  Wholesale sales jumped about 2.4% which pushed the inventory to sales ratio to a record low 1.13.  This bodes well for future production.

The NFIB Small Business Optimism survey was also higher than expected breaking out of its 11 month range rising to the highest level since August 2008.  There was however no improvement in the perceptions of credit availability. 

I would like to revisit April’s unemployment report, a significant statistic I think was lost in the events of last week.  As widely discussed, employment is viewed as a lagging indicator.  Some have coined the current recovery as “jobless,” similar to the anemic recoveries of 1991 and 2001.  As noted earlier historically job creation occurs 2-4 months after the recovery commences, the exception was 1991 and 2001.

Is the current recovery reverting to the norm?  As I wrote on Monday there has been four consecutive months of private job creation.  Civilian employment, the measure of jobs that include the self employed and new start up businesses jumped 550,000 in April bringing the four month total to 1.9 million. 

If one compares today’s job creation to that of the previous two recessions, employment is returning at a pace that is more consistent with the post WW II average.  As per First Trust after the recession ended in March 1991, there were not four consecutive months of job gains until late 1992/early 1993.  After the recession that ended in November 2001, four straight monthly job gains did not occur until late 2003.

Yes there was an uptick in the unemployment rate but as already penned this was the result of a larger work force, a statistic suggesting optimism.  Again as per First Trust, the labor market has grown at an annualized pace of 3.8% in the past four months, almost five times greater than the 10 year average of 0.8%.

I reiterate my long held belief companies panicked in the fall 2008/2inter 2009 and fired to many people fearing for their survival thus suggesting job growth will be faster than many anticipate.  Did April’s employment data validate this view?  I believe a case can be made that it did. 

If the labor force would have grown at it normal rate the unemployment rate would have been in the “mid eight” range.

As stated, reversion to the mean is one of the two absolutes.  I don’t think it is “if” but rather “when” the labor market in the absolute will again grow around its mean. When this does occur I believe unemployment will decline rapidly.

Last night the foreign markets were up. London was up 0.50%, Paris up 0.99% and Frankfurt up 2.04%.  Japan was down 0.16% and Hang Sang up 0.33%.

The Dow should open nominally higher.  The 10-year is off 10/32 to yield 3.56%.