Unemployment Drives the Market Higher

The unemployment rate actually dropped to 9.4% and only 247,000 jobs were lost in July. It seems like many people were fired last month but it is a big improvement for all of 2009. Stock futures have leaped and investors are euphoric. There is plenty of cash sitting on the sidelines and everybody has been keenly focused on this employment number. This could be the tipping point to send the markets running as more shorts cover positions, bears turn to bulls, and the fear of missing the next rally drives cash into the stock market.

The economy is still weak and economic growth is still not in sight. Company costs have been trimmed but top line growth is tepid. The consumer is saving and not spending; banks are still not aggressively lending; and leverage remains high at the consumer level, corporate level, and in all areas of government. The stock market may be separating itself from reality.

It is obvious that the patient has stabilized but he is not ready to run a marathon. Investors feel better about earnings as we all do but as we have said for awhile, stocks need to discount future earnings. Earnings and growth could improve in 2010 but current prices of stocks assume much faster growth than we think likely. If top line growth miraculously improves in the range of 3-5%, then earnings will skyrocket and stocks are trading in the right range. We just aren't that bullish.