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Parsing the Breaking News Deluge

Investors might have expected markets to swoon today following a downward revision to third-quarter GDP. But stocks rose in morning trading, boosted by a drop in weekly jobless claims. Is it really all about the jobs?

Over the past few months, investors have been reacting strongly to breaking news, creating big day to day and even intra-day swings in the market. But economists and advisers say as the crisis in Europe starts to become just a bit less worrisome, market participants have a little more room to pay attention to some of the encouraging signs emerging from economic data. And weekly jobless claims have become particularly important in recent weeks, as they’ve started to suggest a potential turning point in the labor market, says Robert Brusca, the chief economist at Fact & Opinion Economics.

Today, the Labor Department reported that weekly claims for unemployment insurance dropped by 4,000 from last week, falling to their lowest level since April 2008. Weekly data reports can be very volatile, but claims have now fallen for three weeks in a row, and that suggests “something real is happening in the labor market,” writes Ian Shepherdson, the chief U.S. economist for High Frequency Economics. This trend, combined with the unexpected drop in the unemployment rate reported for November, paints an encouraging picture of the health of the labor market, economists say.

Of course, the stock market is forward-looking, so while jobless claims are pointing to current improvement in the labor market, traders are already focusing on what’s likely to happen in the first quarter, says John Canally, an economic strategist for LPL Financial. “There’s a pretty large expectation out there that things decelerate in the first quarter,” Canally says. Plus, headlines in Europe continue to drive the market day to day, he says.

Still, if it weren’t for headlines out of Europe, the steady stream of improving economic data should definitely support a stronger stock market, says Ethan Anderson, a senior portfolio manager for Rehmann Financial. “We’ve had for a while economic data essentially fighting these macro issues, and I don’t think that will go away,” Anderson says. “But it probably does indicate you don’t want to be completely out of the market,” he says. Depending on age and risk tolerance, Anderson says, investors should be reducing cash, looking to be at least 30 to 50% fully invested in the stock portion of their portfolios, and many younger investors should be all in. Conservative investors who want to tiptoe back into the stock market could consider slow-and-steady utilities or undervalued tech stocks, and consumer discretionary stocks should benefit from an improving labor market, he says.

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