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Higher Employment Drives Up Stock Prices

When promising Department of Labor statistics come in, higher employment drives up stock prices. When the figures are not so good stock prices typically fall. The former was the case recently. The United States saw an increase of 172,000 jobs in the private sector while continuing government cutbacks took away 9,000 jobs. The commonly quoted figure was the net gain of 163,000. For the investor, when higher employment drives up stock prices is this the time to jump into the market in general or into individual stocks? Where does fundamental analysis come into the picture and what data points should the investor look for? While unemployment drives up stock prices we see that the unemployment rate has risen as well. What does this all mean for the investor? Let us start with a few thoughts about employment numbers.

Employment and Unemployment Numbers as an Economy Recovers

In June of 2012 the US Department of Labor released the following data:

  • Private sector jobs increased by 172,000
  • Government jobs cut back by 9,000
  • Unemployment rate rose from 8.2% to 8.3%
  • Manufacturing sector jobs rose by 25,000

This is what happened:

  • Continuing government cutbacks reduce available jobs and government payroll
  • The US economy has added on the average 150,000 jobs a month for the last two years
  • This figure barely keeps up with the number of young people entering the labor pool
  • When jobs are scare some people quit looking for work and present a better economic picture that really exists
  • When jobs are available again these same folks start looking for work again and the unemployment numbers look worse just when there are more jobs and more people working
  • The US manufacturing sector has grown virtually every month for the last three years
  • The number of jobs lost in the early stages of the recession comes close to 10,000,000

As a report of higher employment drives up stock prices where should an investor look for long term profits? If one only chooses to invest in broad stock indexes it may be sufficient to simply look at the big numbers. However, many individual stocks may prosper while the broader market is uncertain as to direction. Stock investing always has to do with picking the right sector, stock, time, and price. The fact that the manufacturing sector continues to expand should lead investors to look in that direction. Certainly one can run stock screen looking for advances and declines. But how about finding stocks with overlooked value?

Intrinsic Stock Value in a Recovering Economy

The job growth at this point in the recovery looks dismal only because of the huge number of jobs lost at the onset of the recession. Investors are well advised that while higher employment drives up stock prices that attractive products, well run companies, and forward looking earnings drive stock prices over the long term. What is intrinsic stock value and how does it factor into the employment equation? Intrinsic value is a measure of the current value of forward looking earnings, usually compared to prevailing interest rates. Investing in specific undervalued companies with good prospects always works even as higher employment drives up stock prices across the board.

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