Job gains fueling stock gains

Investors hope hiring continues

NEWYORK—“It’s the job market, stupid!” is fast becoming the new refrain on Wall Street, which is enjoying its biggest early- year stock market surge since 1987 amid a sharp drop in the unemployment rate.

The stubbornly high jobless rate, which has been a nagging headwind for stocks, is morphing into a tailwind, as the percentage of people without jobs fell in January for the fifth month in a row. The government said Friday that 243,000 jobs were created last month, more than 100,000 above what economists expected.

More important, the U. S. unemployment rate fell from 8.5% to 8.3%, its lowest in three years.

Historically, the Standard& Poor’s 500 index has posted its best gains in periods when the unemployment rate has been above 6% but down from its level three months earlier, says Ned Davis Research. Since 1948 stocks have been up nearly 17% a year, on average, when the jobless rate has been “dropping from such high levels,” says NDR investment strategist Tim Hayes.

That bullish trend seems to be underway again. The Dow Jones industrial average on Friday hit its highest level since May 2008. The tech- heavy Nasdaq closed at its highest level in more than 11 years. And the S& P 500’ s 6.9% year- to- date gain is its best start since 1987.

Investors are hoping the hiring pickup continues and boosts economic momentum in 2012. “The market should continue to trend higher as worry gives way to rising optimism,” says Hayes.

A falling unemployment rate is viewed as bullish because it can signal the start of a virtuous cycle of economic positives. If more people have jobs, it will boost confidence, bolster pent- up consumer spending and make CEOS more willing to put some of the mountain of cash they are sitting on to work, says James Paulsen, chief investment strategist at Wells Capital Management.

In short, more jobs are good for stocks. Paulsen says future five- year annualized gains for stocks have been higher when the unemployment rate is elevated. For example, in the past when the unemployment rate has been around the current 8.3%, gains have averaged roughly 10% a year the next five years. In contrast, future gains were just 5% when the unemployment rate was closer to so- called full employment, or around 4%.

“There’s lots of room for improvement when the jobless rate is high,” Paulsen says.