Market Turns as Jobless Rate Peaks

If you talk to people about the state of the U.S. economy, whether on Wall Street or Main Street, the conversation is almost always about unemployment.

While many are aware that the unemployment rate is a lagging indicator, it still scares investors and the general public. The lag can be so long and inconsistent that it does not provide any type of tangible signal for investment purposes.

One reason that investors remain tentative in this environment is that every time the jobless rate forecast rises, the residential mortgage and credit card loss estimates also rise.

Additionally, investors are challenged by their own instincts of self-preservation. Behavioral economics studies indicate the greatest motivation in investing is not "greed" and "fear" but instead, "regret." The possibility of regret makes it uncomfortable and unnatural to take risk in the midst of deteriorating data. If your decision is wrong, you will regret it.

Part of forecasting is extrapolation. Therefore, as the rate of change increases, so do the estimates. Likewise, as the rate of change decreases, the trajectory of the forecast slows or reverses in conjunction with it. Investors have witnessed this trajectory shift on several occasions over the past month.

For example, the IMF, in its latest World Economic Outlook published earlier this month, raised its forecast for U.S. economic growth in 2010 to 0.8% following April's decrease from 1.6% to 0%.

Last week's publication of the FOMC minutes from June 23-24, is another example. The Fed staff, in preparation for the second consecutive meeting, upgraded its outlook for economic activity for the rest of 2009 and 2010.