Market Overreaction to December Jobs Report
The December jobs reported was impressive. According to the Department of Labor, U.S. employers added 167,000 new jobs. Unfortunately, this was more than what investors had expected. Normally more jobs are viewed as a good sign, but in this case it is interpreted as ammunition that the Feds will keep short term interest rates at 5.25% and possibly tighten. The investors that have been betting the Feds would cut interest rate in the first quarter of 2007 have been silenced…for now.
In recent months, the stock market had been rallying in the expectation of interest rate cut in early 2007, but the strong jobs report reduces that chance. It is important to note the Feds could still cut as there are other factors that go into their decision. This jobs number is not the only deciding factor. According to the FOMC's last meeting minutes, the Feds indicated concern over the housing sector and general slow down so we highly doubt they will hike rates. What is most likely to happen is rates will remain at current level. Our opinion is the market is overacting to this employment news. There is no cause for panic. Another factor to take into consideration is companies generally over hire during the holiday season, thus inflating the numbers.
Anytime we are in a bull market, there will be bumps along the way. A small correction is healthy as it allows new investors to enter the market. To hedge against interest rate increase or any other negative sentiments, it would be prudent to evaluate your portfolio and lock in some of your gains. Do not be surprise if the market continues to slide in the coming weeks as money managers will likely take defensive measures and lock in their profits.
