Stocks Start New Year Strong, Jobs Not So Much

The calendar may indicate that a new year has begun, but one week into 2010, global equity markets continue to act like it is still 2009. The S&P 500 closed higher each day this week to post a 2.7% gain and close at the highest level since October 2008. On Friday, stocks reversed earlier losses stemming from the morning's disappointing report on December employment. As has been the case for some time, equity investors interpreted the relatively weak economic news as assurance that the Federal Reserve will continue its easy money policy, providing fuel for the ongoing market rally. So Friday's market action followed the recent pattern from such events: the US dollar declined, gold went up, and stocks rallied.

The December employment report was certainly a disappointment, especially to those who expected the economy to create jobs. Employment fell by 85,000 jobs in December, and revisions to prior months subtracted another 1,000 jobs (we've previously discussed that upward revisions to recent jobs data could be seen as an important turning point). The unemployment rate remained at 10% because the labor force contracted. Why did the labor force contract? Because when those looking for jobs become frustrated by the lack of job openings, they eventually stop actively looking for employment and the government removes them from the labor force for purposes of calculating the unemployment rate. A stark picture of the scale of this problem can be found below, which shows an acceleration in the number of unemployed people filing for emergency unemployment compensation, or those that have been unemployed for so long that they have lost state benefits (typically six months or more). As a result, the unemployment rate will likely remain stubbornly high even after firms begin to hire, as thousands of unemployed re-enter the labor force.