Daily Gains Letter

October Job Numbers a Tale of Two Economies

By for Daily Gains Letter |

October Job NumbersAre the recent U.S. job numbers a tale of two economies? The Labor Department announced last Friday that U.S. employers added 204,000 jobs in October, beating even the most optimistic estimates.

The U.S. unemployment rate, which is based on a separate survey and counted furloughed federal employees as out of work, rose from 7.2% in September to 7.3% in October.

In a world where good news is bad for investors, stocks fell after the opening bell. Why? Because investors are afraid that better job numbers will prompt the Federal Reserve to start tapering its $85.0-billion-per-month quantitative easing (QE) policy sooner than expected.

But that pessimism may be short-lived. The Federal Reserve has been pretty open about what it will take to start raising interest rates: a strong economy, namely a U.S. unemployment rate near 6.5% and inflation at 2.5%.

There’s no arguing that adding more than 200,000 jobs to the U.S. economy is good news; however, a U.S. unemployment rate of 7.3% is nothing to cheer about, regardless of whether the U.S. unemployment numbers were skewed by the U.S. government shutdown or not. The fact of the matter is that U.S. unemployment needs to drop a lot further before the Federal Reserve reins in its easy money policy and congratulates itself.

Mind you, if the Federal Reserve listens to its own economists, any attempts to taper QE could still be a few years away. While the general opinion is a 6.5% U.S. unemployment rate, at least six Federal Reserve economists think a more realistic U.S. unemployment rate goal should be as low as 5.5%.

With a current unemployment rate of 7.3%, that would give Wall Street at least two more years of easy money. That assumes the economic rule of thumb whereby an annual growth rate of three percent will bring the unemployment rate down by one percentage point.

For those who think a 5.5% unemployment rate is still a little too risky, there is another scenario. An even less-aggressive option would see the Federal Reserve start to taper QE in December—but to quell the cries on Wall Street, it would keep interest rates near zero until 2017. Don’t let that date scare you; the Fed economists think interest rates should be kept below normal (two percent) until at least 2020. (Sources: “The Federal Reserve’s Framework for Monetary Policy—Recent Changes and New Questions,” IMF web site, November 7, 2013; “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy,” IMF web site, November 7, 2013.)

Ben Bernanke, the current Federal Reserve chairman, could very well begin to taper in December, but it seems unlikely. With a new head of the Federal Reserve coming to the throne in late January, there’s a good chance he’ll keep everything in place, making the transition a smooth one. And who wants to disrupt the economy just before the holidays?

What does all of this mean for investors? Despite the weak economic environment (stagnant wages, high unemployment, high personal debt, bleak consumer sentiment, etc.) the stock market continues to be the best option for those looking to cushion their retirement portfolio—at least until the Federal Reserve starts to taper in earnest and allows the markets to stand on their own two feet.

When it comes to investing in an uncertain market, it’s a good idea to consider big companies that have a history of consistent performance. Companies like Johnson & Johnson (NYSE/JNJ), Medtronic, Inc. (NYSE/MDT), 1st Source Corporation (NASDAQ/SRCE), and Kimberly-Clark Corporation (NYSE/KMB) may not be as exotic as others, but they do provide investors with capital appreciation and dividend growth.

While these companies’ share prices will ebb and flow with overarching changes in the economy, they will also, because of their strong underlying fundamentals, be able to rebound quicker than most.

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