Market Euphoria About Jobs Report Has Already Ebbed

NEW YORK ( TheStreet) -- Investor euphoria for February's employment report already may have ebbed.

Stock futures popped and the market spiked Friday morning at the opening bell after nonfarm payrolls for February surged 236,000, up from the prior month's revised 119,000 jobs. Economists were looking for just 160,000.

Less than an hour into the trading session, the S&P 500 and the Nasdaq drifted below the flatline and the Dow Jones Industrial Average challenged its lowest levels of the day.

A robust payrolls number like the one printed Friday morning would typically encourage sizeable gains in equity markets, boosted by the promise of an improving labor market and economy amidst four years of sluggish growth. But Friday saw modest growth of less than 0.5% on the three major indices.

"Once we saw equities start to digest the jobs number a little bit more, that's when we started to see equities come off their highs and when the bottom was put in on the metals," said Phil Streible, senior commodities broker at RJO Futures. "I think that people are really not buying that number as much -- 236,000 -- and they're really thinking that there will be big revisions down when we come up with this next nonfarm payroll."

Streible was speaking about the precious metals, specifically gold, which had sold off more than $10 an ounce at the Comex division of the New York Mercantile Exchange, but surged back into green territory to settle with slight gains by the afternoon.

Gold investors have closely tracked the monthly unemployment rate since the Federal Reserve said it would peg a policy of low interest rates to the unemployment number until it dropped to at least about 6.5% (or if inflation hit 2.5%).

Despite the upbeat labor report, unemployment still remains more than one percentage point above the Fed's target, and well above pre-recession levels.

"The problem is, we're still a long way from full employment, and at this pace it's going to take many years to get down to a reasonable unemployment rate," Gary Burtless, a labor economist at Brookings Institution, said in an interview.

Economists have called this an uncommon recovery as U.S. gross domestic product, the housing sector, the labor market and other indicators have grown at their slowest pace in any post-recession recovery since World War II.

The Bureau of Labor Statistics often revises the initial releases of the monthly employment situation in subsequent reports. For example, January's number dropped to 119,000 after an original posting of 157,000 new payrolls. The revisions can often work in a positive direction, like when January's report revised November 2012 payrolls to 247,000 after they had initially been reported at just 146,000.

Taking the report at face value, it's important to note that 236,000 new jobs likely was the most welcome surprise since the spring of last year, when economists credited a warmer-than-expected winter for a surge in added nonfarm payrolls and a steady tick down in the unemployment rate.

"It was a surprising number, the predictions were more in the 150,000 range, which is consistent with somewhat recent levels that we've seen," David Weiman, an economist at Barnard College, said in an interview.

Asked if this was the sign of a bullish trend in the labor market, Weiman said Americans may have to wait and see what happens in Congress with the budget impacts and negotiations.

President Barack Obama spent a large part of the past month warning Congress and the American people that the inability to avoid sequestration -- $85 billion in 2013 across-the-board spending cuts that went into effect on March 1 -- would lead to significant paycuts and furloughs of government civilian workers. He said the impacts of cuts may not immediately be felt in the private sector, but that lower business profits, fewer hires and layoffs would come if the sequester remained in place.

The Congressional Budget Office, a nonpartisan agency that does analysis for Congress, forecast that absence of sequestration would lead to about 0.6 percentage points faster GDP growth. Fiscal hawks have argued that though the cuts would hurt GDP in the short run, it would help rein in government spending and be a small step toward reining in the deficit -- a benefit across the long term, they argue.

The Fed and others have maintained that reduced spending and narrowed deficits are critical to a healthy economy, but they have contended that the environment is too fragile to make those cuts right now. Essentially, these "doves" argue against austerity measures.

"If I had to take my choice between stimulating the GDP by 0.5% or cutting it by 0.5%, at this moment, I would choose stimulus, but the point I'm emphasizing is we're talking about one half of 1%," said Benjamin Freidman, an economist at Harvard University who focuses on fiscal and monetary policy.

In normal times, after Congress had opted for fiscal tightening, the Fed would have likely counteracted that move by implementing monetary easing to soften the economic blow. But with interest rates near 0% and the central bank purchasing some $85 billion in Treasuries and mortgage backed securities, there's not much else it can do.

"That will not happen this time," said Friedman, who added that the small hit on GDP may not be worth a huge fight. "Making a huge thing of it is, in my estimate, not what we ought to be doing."

The president did reiterate the negative impacts to jobs that the sequester could have, but Republicans said Obama had overestimated the troubles. The U.S. equity markets largely appeared to ignore the sequester this week as the Dow surged to four straight record closing highs and the S&P tested multi-year highs of its own this week.

As the Dow, S&P and Nasdaq each gained more than 2% for the week, it begged the question as to whether the president played too much of his hand.

"Well, I think the president had a responsibility to tell the American people what to expect if Congress failed to do anything about the sequester and the arbitrary cuts to, essentially, every government program out there," said David Di Martino, a Democratic strategist in Washington D.C. "He never said that all the cuts would happen on day one, but he was trying to let people know that there are serious consequences for Congress' failure to act."

The equity markets backed off a bit from the session highs and precious metals popped into positive territory -- signals that traders weren't as impressed by the surprise as the February numbers initially printed.

One analyst suggested that this worry of a dark cloud in the jobs report details may not be a terrible thing for investors.

"Future stock returns are higher when you buy stocks during a time of higher unemployment than lower -- no different than when you buy a lower P/E versus a higher P/E," said Lee Munson, chief investment officer of Portfolio, LLC. "So if you buy stock when unemployment is under 4% and everything is good, you're not going to have as good a performance, historically, than if you buy when things are awful and more people are unemployed."

The BLS reported that in February there were 12 million unemployed. The Dow on Friday set an intraday record high of $14,413.17.

-- Written by Joe Deaux in New York.

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