How the August Job Numbers Could Boost Your Stock Portfolio

Economic forecasters were expecting 225,000 jobs last month but today the government reported just 142,000. If recent trends hold, you could use this news to strengthen your portfolio.

First, the consensus forecast of 225,000 was about what we'd averaged for the year. That's not much of a forecast. One can almost imagine consensus forecasters saying, "What's the average monthly gain for 2014? Let's use that for our estimate for next month."

The problem with that approach is that July and August have been the worst months for job creation during this recovery. During the months of summer, job creation averages about two-thirds of what it is during the rest of the year. If you really thought that the average of 225,000 was going to hold for the year, you would adjust that downwards by about a third for August to arrive at a number more like 153,000 - which isn't far off from the 142,000 reported. (And Paul Davidson in US Today reports that the numbers for August have been routinely adjusted upwards in the months after.)

A little dip in August seems more aligned with seasonal trends than an indicator that the recovery has changed. But the appearance of a dip might trigger a weaker market, particularly once September numbers come in.

September has also been weak for job gains, averaging 70-some percent of annual totals. When those numbers get reported next month, people are liable to make it mean that the economy is weakening. One weak month they can brush off but two looks like the start of something bad. It could be one of those ugly Octobers when the market falls. If that happens, wait for panic to set in and then buy those stocks you wished you owned a couple of months ago. A little panic lowers prices.

But if trends hold, October job gains - which won't be reported until November 7 - are likely to turn things around. October has run about 30% higher than the average month, meaning that it could be roughly double what we see for August and September. Also, positive job gains through October would break the all-time record for consecutive months of job gains. Shocked at this sign of dramatic improvement, panic will dissolve into a sigh of relief and then a loud hallelujah. And you could make a little money on the stocks you bought during that time in October when the financial shows gave their microphones to the analysts who always see signs of a coming financial apocalypse.

An August number of 142,000 doesn't really challenge the prospect that we are on track for creating more jobs than any year since 1999. It's actually just a reminder that a month when most people take vacation is never a great month for finding a new job. But if people insist on making it mean something, it could mean something (good) for your portfolio. Stay tuned.

P.S.
This jobs report marks an important milestone. Per Jason Furman's blog, above average unemployment is now largely a function of long-term unemployment. Short-term rates have returned to their pre-Recession levels.