Friday, April 3, 2009

Unemployment at a 25 year high? Let's only rally them 1% then.



So the big news of today was the Labor Department release of the employment situation data. This showed that 663,000 jobs were lost in the US in March and an earlier number was revised higher to 741,000. This bring the total job loss in this recession to 5.1 million and the unemployment rate to 8.5%, it's highest rate since 1983 when the US was coming off the 1980-1981 recession.

This is generally pretty bad news for the economy but it was no worse than the markets expected so they traded up today. Generally investors think the economy is pretty bad. There is a lot of optimism out there around all of the programs that the government has put in place. It seems that investors are willing to give them time to work and so the markets tend to shrug off bad news about the present in anticipation of good news in the future.

So then you have to ask yourself is the market getting ahead of itself? Many pundits think that it is. The way to look at that is to ask yourself what you think the S&P 500 earnings will be and then ask yourself what price to earnings multiple you think is justified knowing that the historical average is 16. A PE higher than 16 would be appropriate if you felt earnings would grow faster than average and below 16 if you thought they would grow slower.

S&P has a handy spreadsheet of bottom up earnings estimates from Wall St. firms on thier website. From this you can see that the earnings estimates for 2009 are about $62 and given the current S&P level of 840 that implies a PE of about 13.5 a little less than the normal which you would expect in a weak recovery which is what economists generally think will happen.

Given that I don't think there is too much upside from here though I think the market may well trend higher. I also think the market will continue to ignore bad news unless it is far worse than expected. Earnings for Q1 are coming up in the next few weeks and I think the trend of ignoring bad news and rallying on mediocre news may continue as well. People are likely to be looking more closely at what guidance companies give than at the earnings themselves.

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