Finally – Good News on Jobs

We are finally getting good news on the employment front.  As you can see from the chart, new jobless claims have been declining for the last seven weeks.   According to this CNN Money article, for the first time since the recession began in 2007, more employers are planning to add jobs in the next six months, compared to the ones planning to eliminate them.

We have already seen other signs of recovery in industrial production and housing, but not yet in employment.  So this development is very significant.

Green Light Ahead Again?

It appears that the cockroach theory is right, at least as far as earnings surprises are concerned.  Just like in Q2 and shown in this post, a vast majority of companies are exceeding earnings estimates, as evidenced in weekly summary from briefing.com.  Once again, the market advance has been validated by excellent quarterly reports.

Hurrah for Dow 10,000? Not…

A couple of days ago, the Dow Jones crossed the 10,000 mark.  Is this a cause for celebration?  Hardly.  According to Wall Street Journal, it was the 25th time the index crossed that milestone, the first time being in 1999.  So, despite the “meteoric” 50% plus gain of the Dow since March lows, we are still at the levels of 10 years ago.  By historical measures, markets gain about 10% annually, which translates to 250% gain in 10 years.  So this last decade has been quite horrible for the markets, as I am sure you realize.

This has happened before, in the thirties and then again in the seventies.  The last time, the markets were stagnant from 1966 to 1982, with Dow Jones bouncing around another round milestone, 1000.  There is no way of knowing how long the current stagnation will last, but the markets will revert to historical growth rates, as they have always done in the past.

New Review for My Book

Check out this new review for my book, 42 Rules for Sensible Investing.

No Stopping of This Rebound

Similarly to the previous quarter, this time around the earnings season had a great start.   Bellwethers Alcoa, Intel, and JP Morgan all exceeded expectation by a wide margin.  Take Intel, for example: not only profits were better than expected, but revenues as well.  This is quite important as many analysts were concerned that earnings were driven by cost cutting only.  Now we are seeing evidence that sales are growing as well.

In related news, retail sales improved also, as discussed in this article.  Consumer spending (along with high unemployment), have been dark spots in this recovery for quite some time.   Now, good news on consumer demand will greatly help to boost already increased confidence.

State of the Market

The overall market sentiment now is very similar to that of the previous quarter.  There is still plenty of skepticism around, driven by uncertainty of this recovery and the very fact that market gains happened so extraordinarily quickly.  We are still climbing the wall of worry, with many investors remaining on the sidelines convinced that we are in the bear market rally (which from the contrarian point of view is the ideal market condition).  Similarly to the last quarter, the coming earnings season is going to be hugely important.  Q2 (as well as Q1) results exceeded expectations, and of course the markets are driven by the earnings.  If this trend continues, so will this rally.

There are also important differences between current and previous quarters.  Major economic indicators improved significantly.  For example, then the economy was still contracting (although at a lower rate of decline) and housing prices were falling.  Now it is a virtual certainty that GDP rose in Q3 and the housing market is stabilizing.  Not everything is roses, of course.  Just a few days ago, manufacturing, consumer confidence, and unemployment reports were worse than expected.   This recovery, as any other, will have its hurdles and the markets could get bumpy.

The market action over the last two years confirmed my long-held belief that market timing is impossible and that one has to stay invested to participate in sharp upward moves.  Chances are, someone who sold on the way down is still on the sidelines waiting for a good market.  And they often buy after the market has already been good.