The jobless recovery marches on.
The latest unemployment numbers out of the U.S. and Canada reveal that rates have jumped to 10.2 (the worst since 1983) and 8.8 per cent respectively, much higher numbers than many had anticipated. With this negative news, how has the market continued its upward momentum and why should investors continue to be buyers instead of sellers?
For the most part, North American stock markets continue to shrug off bad news and move higher because the majority of companies that make up these indices continue to perform better. While it's true the bar has been set quite low and thus easy to beat, most companies appear to have right-sized their operations and cut costs to match these difficult times, and employers have been able to get more out of their workers without needing to add more staff. The small number of companies that are hiring is being matched by those companies that are still eliminating jobs, but for the most part companies are doing neither right now.
Despite the high unemployment numbers in both Canada and the U.S., about 80-90 per cent of the population is still working. These are the individuals who have been spending money over the last three months because they are able to take advantage of bargains available at their local retailers. They are also able to take advantage of record low interest rates, and it appears they are doing just that. Many U.S. retailers have reported positive sales numbers over the last quarter.
For the moment, whatever dollars that are lost due to lower consumer spending on the back of higher unemployment is being made up by government spending. In the short term, this can and will work, but over the long term, the both governments need to get people back to work and spending in order for their economies to grow consistently again.
In light of the recent ugly unemployment numbers, the Bank of Canada and U.S. Federal Reserve look to be on hold for the foreseeable future with respect to interest rates increases. Most economists believe that they will not even think about raising rates until the second half of 2010, so it appears the current low interest rate environment will be with us for many months to come.
In my opinion, the stock market is telling investors that this environment is trumping any other news, good or bad, at this time. Coupled with government stimulus plans still in the works, this provides the optimum environment for companies to do better, and for investors to do well by buying shares of these publicly traded companies. Bad news like the high unemployment numbers seems only to slow down the markets temporarily, but they have so far bounced back quickly from such negative news. I feel this is because the low interest rate environment right now is most important to the stock market.
I believe the most recent unemployment numbers don’t really change much with respect to the investing environment. All these numbers tell us is that the recovery will be quite slow. Thus, as investors we should continue to take advantage of the good investment environment for as long as it remains. Try to purchase investments with good dividends if possible so you can continue to get paid while you wait for further growth in the future. If you are an investor looking for growth, look to sectors of the market that tend to grow during the early stages of economic recovery, as we may be at this stage for some time to come.
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Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.