On Thursday, we learned that GDP was stronger during the third quarter than we expected, with an annualized growth rate of 2.8%.  Interestingly, it was not because of improved consumer spending, which was 1.5% of the 2.8%.  Improved exports contributed 0.31%.  But, the most surprising increase was inventory levels, which contributed 0.83%.  That could be because businesses are not able to sell existing inventory, but it is more likely because businesses see greater sales opportunities ahead.  This is a good!

With this strong economic data, it was not surprising that futures on Friday morning indicated a 30-point jump in the Dow at the opening.  At 8:30 AM, the October Jobs Report was issued and was also stronger than expected, with 204 thousand jobs being created, far above the 125 thousand that were expected.

With that good economic news, you would expect futures to strengthen and gain more than 30 points at the opening.  Instead, the futures market immediately dropped 60 points.  Why?  Because an improving economy means reducing quantitative easing sooner.  Because the market faces withdrawal from the “sugar high” sooner, if the job market is stronger.  More jobs means less sugar!

Sure enough, the market opened weakly.  However, as analysts dug into the Jobs Report, the labor market didn’t look so good after all.  As it turns out, almost half the jobs were minimum wage jobs in hospitality and leisure industry.  The number of government workers continues to decline.  There was scant improvement in the number of part-time jobholders who could not find full-time jobs.  Businesses are unusually reluctant to hire full-time workers for this stage in the recovery.  But, the most inexplicable number was the 720 thousand decrease in the labor force, reducing the Labor Force Participation Rate to a 35-year low of only 62.8%.  It is hard to believe so many baby-boomers retired in October or that many young mothers chose to be stay-at-home mothers or so many people gave up and opted for continued poverty.  Bottom line:  the numbers in the latest Jobs Report raise too many questions.

Sure enough, the market realized the Fed would continue quantitative easing longer after this confusing Jobs Report, and the Dow jumped 167 points to a new all-time high.

The teaching point is that the stock market does not reflect economic conditions solely but also measures those conditions against expectations.  That’s why good economic news is sometimes bad news.

Got that?