This morning the U.S. Department of Labor provided more evidence of this cycle’s painfully slow recovery in employment. The unemployment rate ticked up to 9.8% from October’s 9.6%, and the economy added only 39,000 jobs in November versus an expectation of 150,000 jobs. Despite the disappointing employment figures, equity markets held their strong gains for the week. The S&P 500 has rallied nearly 20% from this summer’s lows, based on the Federal Reserve’s quantitative easing program as well as improving economic fundamentals. Although European sovereign debt woes and China’s efforts to slow its economy remain significant risks, recent stock market strength suggests the bull market should continue into 2011.
Several catalysts for higher stock prices are evident, including better economic data, extension of tax cuts, and seasonal market tendencies. This morning’s jobs report was a bit of an outlier relative to other data indicating gradual economic improvement, including weekly unemployment claims, consumer confidence, retail sales, and the manufacturing and service sector purchasing manager indexes. In any event, the rise in unemployment boosts the odds of a two year extension of all Bush tax cuts, and certainly means the Fed will continue pumping liquidity into the markets. In addition, the market has tended to perform well in a mid-term election year, and the following January has been the best single month of the presidential cycle.
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