Because investors equate lower payrolls with higher profits, the stock market historically performs better with higher unemployment. Image: CC Davic C. Foster/Flickr

Stocks rose on the jobs report released by the Labor Department Friday. Job creation in the last two months is the strongest it has been since before the recession. But the market’s current response to a positive jobs report is unusual, and stocks could fall again if the labor market continues to improve.

First quarter gain for stocks and jobs

The U.S. unemployment rate dropped from 8.9 percent in February to 8.8 percent in March, the lowest rate in two years, according to the Labor Department. In response, stocks rose across the market. The Dow Jones Industrial Average rose 87 points to 12,406, a 0.7 percent gain and a new high for 2011. The Standard & Poor’s 500 rose 10 points to 1,335, a 0.8 percent gain. The Nasdaq composite rose 15 points to 2,796, a 0.6 percent gain. Payrolls at U.S. companies increased by 216,000 workers in March after a 194,000 gain the month before. The unemployment rate has been dropping since it was 9.8 percent November, the biggest four-month decrease since 1983. U.S. stocks surged 5.4 percent in the three months ending with March for the biggest first-quarter gain since 1998.

The counterintuitive relationship between markets and labor

Normally companies announcing layoffs benefit on Wall Street because investors believe smaller payrolls equal higher profits. When the labor market was hemorrhaging jobs in January 2009, the stock market gained. In fact, in the past 60 years the stock market has performed better on average when the U.S. unemployment rate was higher rather than lower. According to Ned Davis Research, the S&P 500 mustered an average annualized gain of 13.5 percent when the unemployment rate was above 6 percent. When unemployment dipped to 4.3 percent or below, the S&P 500 managed just a 2.1 percent gain on average. In January 2009 Ed Clissold of Ned Davis Research told MarketWatch that in addition to lower costs and higher profits, traders salivate at high unemployment because it means they will benefit from economic stimulus provided by the federal government. Traders may also believe that by the time unemployment news hits the streets, stock prices have already been affected by job cuts and shares can be flipped for profit if they rise.

Traders hope job news doesn’t get too good

Stocks may have surged on Friday’s good labor market news not because unemployment has dropped but because it hasn’t dropped too much. Traders myopically chase short term gains and don’t consider long-term strategies. In the current environment, many of these traders believe the stock market has been propped up by the Federal Reserve bond buying program known as QE2. Some of them, especially those in the fixed-income market, worry that if the labor market gets too strong, the Fed will quit buying bonds after QE2 is slated to end in June, and the gravy train will stop. As the return of record profits and bonuses on Wall Street while average Americans have struggled has shown, what’s good for stocks isn’t necessarily good for the country. If more Americans keep finding work, the markets could change their tune.

Sources

Associated Press

MarketWatch

CNNMoney.com

Unrest in Libya has caused oil prices to spike, negatively affecting stock markets as Moammar Gadhafi pledges retaliation against protesters. Image from Wikimedia Commons.

Political turmoil in Libya has led to an increase in worldwide oil prices. Libya is a major exporter of oil, and unrest in that nation could lead to a drop in the output of oil. Despite a growing number of people calling for him to leave, Libyan ruler Moammar Gadhafi refuses to abdicate his office.

Major oil producer Libya paralyzed by protests

The worsening turmoil in North African nation Libya has reverberated throughout the financial world as instability in a major oil producing nation led to a slide in stock markets, according to the Los Angeles Times. Prices of crude oil rose, which caused the Dow Jones Industrial average to slide more than 178 points downward during trading on Tuesday, Feb. 22. Crude oil futures rose from $91.42 per barrel on Monday to $94.49 on Tuesday. However, oil prices slid to $93.57 per barrel of crude oil after the oil minister of Saudi Arabia, Ali Ibrahim Naimi, announced that the Organization of Petroleum Exporting Countries would make up any shortfalls due to unrest in Libya.

Gadhafi refuses to leave

Moammar Gadhafi (also Gaddafi or al-Gaddafi), ruler of Libya, has refused to leave his post, according to The Telegraph. Unlike other rulers in nearby countries who managed a modicum of empathy for those harmed during protests, Gadhafi spoke on Libyan state television, promising further bloodshed should the Libyan protests continue. Gadhafi said he would use the death penalty on protesters and said he is completely justified in the use of force against dissidents who are calling for an end to his four decades at the helm of Libya. He also pledged that he wouldn’t leave and would “die a martyr.”

Libyan officials leave posts in protest

In an expression of solidarity with the protesters, several key Libyan officials and diplomats have left their posts and in some cases defected, according to the Christian Science Monitor. Ambassadors and other Libyan diplomatic staff at the United Nations and in India, Australia, the United States and elsewhere have called for an end to the bloodshed. Loyalists and security forces have shot protesters, and reports are emerging that African mercenaries have been called in by Gadhafi to shoot at crowds. Members of the Libyan military still loyal to Gadhafi have used jets and helicopters to fire on protesters.

Sources

Los Angeles Times

The Telegraph

Christian Science Monitor

The Santa Claus rally is a year-end stock market surge occurring in countries where Christmas is a national holiday. Image: CC Vanessa Pike-Russell/Flickr

The Santa Claus rally in the stock market, if it has arrived on schedule, will begin Monday, Dec. 27. Historically the Santa Claus rally is the last five trading days of the year in countries that celebrate Christmas. The Dow Jones Industrial Average, already enjoying a strong December, hit a two-year high on Dec. 22.

Yes Virginia, there is a Santa Claus rally

The Santa Claus rally, also known as the “December Effect,” occurs during the final week of trading before the new year. A Santa Claus rally is generally reliable because of an increase in trading that must be executed before the end of the year for accounting and tax purposes. Santa Claus rallies are also attributed to traders anticipating the “January Effect,” an infusion of funds into the market that occurs at the start of the new year. Since the financial crisis hit in 2008 the January Effect has had diminished impact, but Santa Claus rallies in recent years have remained strong.

Evidence for the Santa Claus rally

The Santa Claus rally may have something to do with celebrating Christmas as a national holiday. A study by researchers at a New Zealand university found that year-end stock market surges became evident in Britain when Christmas became a national holiday in 1835. The same phenomenon started happening in the U.S when Christmas became officially observed in 1870. The study also found that year-end market surges are stronger in countries where Christianity is the dominant religion and Christmas is widely celebrated. The study, however, doesn’t answer the question of why celebrating Christmas would lead to a Santa Claus rally.

The Santa Claus rally 2010

The 2010 Santa Claus rally may have started early. The Dow hit a two-year high on Dec. 22 and gained for the 10th time in 11 sessions. As Christmas drew near, volume was light and many traders had already taken the week off. The market has showed optimism over signs that the global economy is improving. Reassuring statements from China about how the euro zone will be able to solve its debt problems have also helped. Plus, the general lack of economic news or corporate maneuvers during the holiday season have put normally jittery traders at ease.

Sources

MarketWatch

Investorplace.com

Wikipedia

This was the headline today as a trading error left the DJIA reeling. Image from Flickr.

Any trader watching the stock market today just about needed a shock to the heart as the DJIA – Dow Jones Industrial Average – plummeted almost 1,000 points because of a trading error. The DJIA nosedive, set off by a Proctor and Gamble sell-off, reverberated through the New York Stock Exchange as well. Talk about a big trading error; perhaps some Citigroup individual is about to start looking for internet loans — or a new job?

The DJIA and NYSE drops raise trading error questions

In just a few short hours today, because of a trading error, the Dow Jones Industrial Average and New York Stock Exchange both lost almost 1,000 point – nearly 10 percent of their value. Between about 2 p.m. and 3 p.m. today, the plunge triggered worries about market volatility, financial downfall and more in a market already shaky from the economic downturn. This DJIA drop was due mostly to a huge sale of Proctor & Gamble stock. So what happened?

Trading error to blame for DJIA tumble

Many financial news sources are now saying that the stock market today was reacting to one wrong letter in a trading error. A Citigroup employee erroneously entered a “b” rather than an “m” in a trading program – selling off billions (rather than millions) of Proctor & Gamble stock futures. In just two minutes, 16 billion futures were sold.

Citigroup denies DJIA trading error

Citigroup, which is launching an investigation into the DJIA trading error, has said “At this point we have no evidence that Citi was involved in any erroneous transaction.” Whether Citigroup was involved or not, the center of the Dow Jones’ plummet today was definitely the falling Proctor & Gamble stock.

Electronic trading exacerbated trading error

The trading error, in and of itself, was bad enough to send the DJIA into a tailspin. What made the NYSE and Nasdaq join in the all-out tumble, though, is a story of automated trading. While there is still plenty of stock trading that happens on the floor of the New York Stock Exchange, most trades are electronic, and many are automated. When the price of Proctor and Gamble stocks started to nosedive, automated trading programs jumped on the bandwagon. Programmed to sell when a stock hits a particular price, these programs started selling off hundreds of millions of shares.

Trading error heightens fear of DIJA fall

Though the tumbling DJIA today was the result of a trading error, it is heightening fear of another financial crisis. Riots in Greece combined with doubts about global economic recovery are leaving many investors very nervous. In the end, the trading error may have been a human error – but it is one that doesn’t do much to restore confidence in the financial industry.

Sources:

CNBC
CNBC