Daily Gains Letter

Wall Street Cheers 13.6% Unemployment Rate; S&P 500 Soars!

By for Daily Gains Letter |

Unemployment RateBad news on Main Street is good news for Wall Street. Illogical heads prevailed on Tuesday after the U.S. government announced that the unemployment rate dipped to an ever-so-modest 7.2% in September, from 7.3% in August. The U.S. added just 148,000 new jobs in September—far short of the forecasted gain of 180,000 jobs for the month. (Source: “The Employment Situation – September 2013,” Bureau of Labor Statistics web site, October 22, 2013.)

The number of long-term unemployed (those without a job for at least 27 weeks) remains stubbornly high at 4.1 million, and the underemployment rate is at an eye-watering 13.6%, up a sliver from 13.4% in August.

Weak jobs numbers means the Federal Reserve will continue its $85.0-billion-per-month quantitative easing policy into 2014. Those who do not read these pages were apparently surprised last month when the Federal Reserve did what it said it was going to do—namely, keep its stimulus package intact until the economy improves to a 6.5% unemployment rate and a 2.5% inflation rate.

It clearly hasn’t, isn’t, and won’t for the foreseeable future.

Those bad jobs numbers sent the S&P 500 into record intra-day territory. In the week since Congress ended the U.S. government shutdown, raised the debt ceiling, and reported stubbornly high unemployment, the S&P 500 climbed more than three percent. Year-to-date, the S&P 500 is up more than 22%.

That increase is in sharp contrast to anything approaching reality on Wall Street. During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance, 81% during the second quarter, and a record 83% for the third quarter. (Source: “Earnings Insight,” FactSet web site, October 4, 2013.)

Even after a record number of S&P 500 companies revised their earnings lower, they’re still having trouble meeting their depressed forecasts. Granted, while only one-fifth of the companies in the S&P 500 have reported actual results, the percentage that has reported earnings above estimates is below the four-year average. At the same time, the percentage of companies that have reported revenue above estimates is also below the four-year average.

The fourth quarter is less than a month old, but already, 18 companies in the S&P 500 have issued EPS guidance for the fourth quarter. Of these, 14 have issued negative EPS guidance and four have issued positive EPS guidance—meaning that 78% have issued negative guidance, well above the five-year average of 63%. That number will continue to rise the deeper we get into the fourth quarter. (Source: “Earnings Insight,” FactSet web site, October 18, 2013.)

What all of this disconnect means is that you can’t fight quantitative easing. So long as the U.S. economy remains weak and the easy money is flowing, the S&P 500, Dow Jones Industrial Average, NASDAQ, and NYSE will continue to notch up gains.

It also means that it’s not too late for investors on the sidelines to take advantage of Wall Street’s neurotic optimism and the Federal Reserve’s generosity. Those bullish on the S&P 500 might want to look into the SPDR S&P 500 ETF Trust (NYSEArca/SPY).

Or, knowing that the consumer discretionary sector has reported the highest earnings growth for the quarter, it might not be a bad idea to look at a corresponding exchange-traded fund (ETF) like the PowerShares Dynamic Consumer Disc (NYSEArca/PEZ) or First Trust Consumer Disc AlphaDEX (NYSEArca/FXD).

Everything you learned in school about rational investors making informed decisions based on sound due diligence is an urban legend; investors follow the money. And for now, that trail leads to the Federal Reserve’s overworked printing press.

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