The Fundamentals Stink: Buy Stocks

A favorite example is oil. I became bullish on crude oil in December 2003. As it moved through the $30s and $40s, we heard every rationale why the price was unsustainable: there was a $20 terror premium, a lack of refining capacity, it was the fault of speculators. The reality was that a combination of massive government stimulus plus a huge growth spurt in China, combined with a finite supply, was pressuring prices.

But the reality didn't matter, until it suddenly did. Once the price passed $55, it became apparent the rationales were false, and that a new intellectual framework had to be adapted so the mentally inflexible could contextualize the price of oil. China and global growth were a convenient fit for those looking for an explanation for oil prices they could live with. A similar process happens with most other economic news and is going on now with jobs and inflation data.

Data Point vs. Data Series

It's important to recall that economic data -- indeed, any data series -- is not a snapshot, but a moving picture. And even a moving picture requires context.

Consider two factors in the unemployment rate: long-term unemployed and personal income.

The common (but incorrect) answer simply assumes the rate is low because many more people are getting jobs. The reality is that people have been dropping out of the labor force at an unprecedented rate. Five percent unemployment reflects a dearth of job seekers, not a plethora of new jobs.

Some talking heads have touted the drop in long-term unemployed to 17.8% from over 20% in May as a positive. How can that be bad, you may wonder? Context: Historically, an unemployment rate of 5% is typically accompanied by a long-term jobless rate of 10.7% -- not 17.8%, according to the same EPI release that was widely touted as revealing better income data.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.