That Nagging J-O-B-S Issue

In retrospect, I should have seen this one coming.

When we gathered the end-of-the-year stock market predictions for our annual contest , we received 7 contest entries. Not a single one anticipated a decline in the stock market in 2010. In terms of an investor sentiment index, that's a very bearish signal, as the sentiment index is a contrarian indicator, wherein any reading above 50% bullish is negative. The IcebergCarwash sentiment indicator is 100% bullish, which is downright scary.

The idea behind the investor sentiment index is rather simple. If a significant percentage of investors are bullish, for example, the assumption is that these people are already in the market, so current price levels indicate their optimism. If, on the other hand, most investors are bearish, this typically means that many investors are currently on the sidelines, and when their sentiment changes for the better, their buying activity will put upward price pressure on the market.

It is debatable as to whether or not investor sentiment indices are accurate predictors of the future short-term direction of financial markets, but there are plenty of advisory services who track it.

Using the IcebergCarwash sentiment index, then, we should've been bearish on the market at the outset of the year. Indeed, through Friday, February 5th, the market is down 4.4% for the year, as measured by the S&P 500.

IcebergCarwash's increasingly obvious (or obviously increasing?) relevance in the world of Finance aside, the market's recent performance seems to be a matter of financial market participants starting to catch on to the idea that we cannot have a meaningful recovery in the U.S. without job growth. On Friday, the Labor Department reported that the U.S. economy lost about 20,000 more jobs in January. While that's not a large number by any means, it does indicate that our economy is not yet adding a significant number of jobs, and that any employment-driven recovery is still a while off.

The implication, of course, is that the government needs to focus nearly all of its legislative efforts on job creation. Things like health care reform, while important, will only serve to distract our lawmakers from the task of creating jobs. We absolutely need to put any other major items on the back burner. Unfortunately, the President and his liberal brethren in Congress are much more concerned with pushing through the key elements of their liberal agenda than with actually helping Americans get back to work.

If our lawmakers were to actually put the appropriate amount of focus on job creation, the hope here is that any resulting policies and tactics would result in actual job creation. For example, while extending unemployment benefits (yet again) is certainly a good thing to do from a humanitarian standpoint, it doesn't actually do much to create jobs. Like it or not, companies need to be convinced that adding workers at this point is in their best interests. Considering that so many companies have been managing rather well for quite some time now with reduced headcount, and enjoying the resulting improvements in their respective operating cost models, there's a real reluctance to add jobs. We've got to grease the rails, by offering something like corporate tax credits for newly created positions. Those who typically assail anything that even smacks of "corporate welfare" will surely howl, but these people are clueless, and should not be listened to.

If Congress doesn't act soon to fuel a recovery in employment, the stock market's performance might turn out to be the least of our worries.

As for me, my 2010 year-end stock prediction was the lowest of all of the entries, so if the market declines in 2010, I'll win the contest. It won't be much of a consolation, though.