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Jobs Report Signals 'Paradigm Shift' in Equity Investing

Stocks in this article: SPY

NEW YORK (TheStreet) -- Party like it's 2007 because Friday's November jobs report reintroduced the once-proud concept that market action doesn't have to depend on the Federal Reserve. It can actually turn on the companies' fundamentals, their profits and losses, rates of growth.

The United States added 203,000 jobs in November as the unemployment rate dipped to a 5-year low of 7%. Adding elation to the better-than-expected data was an uptick in labor force participation and hourly wages. Analysts said the report marked a critical economic shift five years out from the 2008 financial crisis.

"The exciting part about this is that the market has shifted from strict taper talk to fundamentals," Mike Serio, regional chief investment officer for Wells Fargo Private Banks, said in a phone interview. "That is big; it's almost a paradigm shift."

September and October combined payroll revisions showed a gain of 8,000. On Thursday, revised third-quarter gross domestic product jumped to 3.6% and jobless claims came in much lower than expected. Private payrolls, reported by ADP on Wednesday, surged more than 30,000 above economists' forecast. On Monday, the November Institute for Supply Management's manufacturing index hit a two-and-a-half-year high.

A lot of positives. The raft of strong economic data has more optimistic analysts forecasting that the Fed will scale back its economic stimulus program during its upcoming policy-making meeting while more skeptical analysts caution that the central bank is poised to announce that it will begin a so-called tapering in the first quarter of 2014.

"I expect that they'll signal that they're going to be taking this punch bowl away," Mike McGlone, research director at ETF Securities U.S., said in a phone interview from New York. McGlone said if central bankers don't even show that initiative "the market will take that as an irresponsible Fed."

A recent phenomenon in the equity market has been a good-news-is-bad-news scenario whereby key economic indicators print better-than-forecast data but sink stocks. This irony, of course, is due to the Fed's quantitative easing program. Fed Chairman Ben Bernanke took unprecedented steps during the financial crisis to provide support to an economy that was on the brink of collapse. He lowered the federal funds rate to near 0%, but couple it with massive monetary stimulus.

The effects, while hotly debated, have fueled the S&P 500 to all-time highs this year off its lows of March 2009. Essentially, investors viewed Bernanke's pledge to remain "highly accommodative" as a guarantee to support the recovering economy. However, the most recent stimulus program has been open-ended, meaning that the Fed will implement monetary stimulus on a month-to-month basis with no specific conclusion in mind until it deems the economy strong enough to cut back on the $85 billion in asset purchases and eventually end the program.

In the early 2013 months, when economic data was showing mixed results, markets would drop if, for example, the monthly jobs report beat expectations. The reasoning being that it suggested the Fed may slow its stimulus program before the market was certain that the economy was strengthening without central bank intervention.

Which returns us to why analysts were cheering Friday's November jobs report.

Heading into Friday, the S&P had dropped every day this past week as data continued to indicate an economy on the rebound. But the 203,000 jobs added last month notched a fourth-straight positive labor report, and suggested that combined with strong data from other sectors of the economy, the country may actually be on the path to growth without the need for central banking help. Imagine that.

"It is indicating that the economy is improving, it does look as if it's likely to stand on its own two feet, but at the same time it's not getting up too fast and therefore likely to faint later on," said Sam Stovall, chief equity strategist at S&P Capital IQ.

The 7% unemployment rate remains uncharacteristically high for such a long period of time, and the Fed doesn't yet appear sufficiently confident to let it run without continued stimulus. But after a week of encouraging data that may foretell a positive shift in the macro economy, we may be on the cusp of a fundamentals-driven stock market and a labor market that brings long-term unemployed back to offices across the continent.

-- Written by Joe Deaux in New York.

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