Unemployment Rises, Markets Rejoice
New figures out late last week showed Australia’s unemployment rate leapt higher in October.
The latest data showed 19,000 jobs were lost, the worst monthly fall in employment in three years.
The unemployment rate is up to 5.3%, moving away from the RBA’s stated goal of 4.5%. Nervous times for central bankers and government policy makers.
It takes 25,100 new jobs per month, just to keep up with population growth, so you can understand why this news has economists worried.
Callous traders on other hand…
Well, they were licking their lips.
Let me explain why…
When bad news is good news
Take a look at the Aussie dollar in the seconds after these numbers came out:
Source: ABC News
The dollar tumbled because traders realised these jobs numbers had significantly increased the chances of an interest rate cut, maybe even as soon as December.
RBC’s Su-Lin Ong said:
‘Today’s report should bring a bit more December cut pricing back into the frame, and we note February market-implied odds have jumped from around 50 per cent yesterday to 67 per cent post the number.’
Now here’s the thing…
With interest rates set to fall in the months ahead, I think we’re about to see the stock market push into record territory.
Forget the grumblings of the doomsayers and nervous Nellies.
Instead look at what the weight of money is telling you.
The S&P/ASX 200 — the index of the 200 largest companies on the Australian stock exchange — is just 50 points off its record high level of 6,845 as I type.
We could break through this level as early as today.
And then after that who knows how far it’ll go. History suggests when markets break to new highs, they tend to keep going.
So, what’s happening?
Well, lower interest rates are driving funds back into the stock market. And the lower they go, the more this will happen.
And the further interest rates fall, the more people are likely to jump back into the market for higher yielding dividend stocks.
That’s why ‘bad’ news — like unemployment rising — is ‘good’ news to callous traders’ ears.
Here’s just a few of the top paying dividend companies on offer right now:
Source: Market Index
A 7.59% dividend yield from Bank of Queensland Ltd [ASX:BOQ] is far better than the 2.15% you’ll get in their savings account!
Of course, these dividends come with bigger risks. There’s no guarantee they’ll stay at today’s levels, and there’s also the risk the shares fall in value.
But you can see why investors might start to think the risk is worth it with savings rates fast approaching zero.
They’re stuck between a rock and a hard place when it comes to generating income and many are choosing to take the gamble on dividend stocks.
The FOMO effect
This of course has a flow-on effect.
As we power through to record highs — as I expect we will — the market pessimists will resist at first. They won’t believe the rise is real.
But some traders will jump on a lot quicker. Especially so-called ‘quant funds’.
Computer programs run these funds and they’re designed to act without emotion or bias. This means they won’t be swayed by the latest bearish opinion piece!
And these funds are a bigger beast than you might imagine.
Ben Clark of TMS Capital told the AFR on Sunday:
‘It’s underestimated how much money is in quant funds in Australia, and a lot of them will follow price momentum.’
As these momentum funds push the market higher, I think we’ll see ‘normal’ investors start to FOMO (fear of missing out) into stocks too.
This will create several waves of buying as fear turns to greed, pushing the ASX ever higher.
Internationally, there are more market catalysts that could hit too.
With President Trump’s 2020 US–China trade deal election year wildcard still to be played, I’ve a funny feeling markets will rip higher and longer than most think right now.
Lower interest rates, cheap money, QE, government spending, it’ll all be thrown at the economy in due course.
Of course, this will probably end in disaster one day.
One day the unemployment rate will jump and not stop moving higher. One day there’ll be no more room for interest rates to fall.
The sober economists and doomsayers will all be right one day, because an economy based on ballooning debt isn’t sustainable.
But a lot of water might go under the bridge until that ‘one day’ comes.
It might sound contradictory, but I can see the stock market surging higher in the near term, and it all ending in disaster one day too.
Despite what you might hear, this is nothing new. We’re not living in ‘unusually’ special times.
That’s just the way the markets have always been.
Editor, Money Morning
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