The Dow Surges on Higher Unemployment. Wait, What?

The Dow Jones Industrial Average (INDEX: ^DJI  ) had a perplexing day today. The market roared higher out of the gate and maintained the momentum all the way to market close, where it finished up 1.7%. The news seems a bit contradictory, though. The unemployment rate rose to 8.3%, yet we saw better-than-expected nonfarm payroll additions. Jobs grew by more than 163,000, well in excess of the 100,000 that was expected, according to a Reuters survey.

Here is a quick look at how things are stacking up compared with last month.

 Metric

June

July

Expected jobs growth 100,000 100,000
Actual jobs growth 64,000 163,000
Unemployment rate 8.20% 8.30%

So how is it that unemployment rose while we added so many jobs? One major cause is probably the nature of the reports. The unemployment figure comes from a household survey, which contrasts with the non-farm payroll figure that we get from the establishment survey. The former survey will include farmers, who have had a particularly difficult month because of the drought in the Midwest. Taking a look at Labor Department figures that strip out this statistic, you'd see that there was actually a net jobs gain for the month.

So on the surface it seems counterintuitive that the market would surge on a rising unemployment rate, but dig in a bit and you see that there is a method to the madness after all. As is the nature of big days like this, investors were treated to a big drop in the Volatility Index (INDEX: ^VIX  ) . The "fear index," as it is otherwise known, fell 11% and is trading dramatically closer to its 52-week low than to its high, and that spells good things for the long-term investor, who has taken a volatility beating the past few years.

It follows, then, that the more volatile stocks on the Dow, such as Hewlett-Packard (NYSE: HPQ  ) and Bank of America (NYSE: BAC  ) , had a rip-roaring good time today, while more defensive plain Jane investments like McDonald's (NYSE: MCD  ) and AT&T had a more muted response. So does that mean HP and Bank of America are out of the woods and Mickey D's is a dog? Absolutely not. A great investment proves itself over the long run. Hewlett-Packard remains the worst-performing Dow stock of the year by a mile and has fundamental weakness to correct before it moves from a value trap that I wouldn't buy with my enemy's wallet, to a legitimate turnaround story on the cheap.

Fellow Fool Morgan Housel accurately noted that 80% of your returns come 20% of the time. The only problem is we never know that 20% will strike. Today is a perfect example. Had you told investors before the market open that the unemployment rate would have gone up after remaining stubbornly high and weighing on stocks for months, most of them would have expected the market to drop today. Instead, we were treated to the opposite.

And that's the nature of markets. They're rarely predictable, which is why we advocate tuning out the market babble on a daily basis and buying and holding great companies for the long run. It's a proven technique we've used to stomp the markets for years. You can get started doing the same today with The Motley Fool's Top Stock for 2012. It's our chief investment officer's highest-conviction stock for the next year, and it will probably be yours, too, after you read his report.

Austin Smith owns shares of McDonald's. The Motley Fool owns shares of McDonald's and Bank of America. Motley Fool newsletter services have recommended buying shares of McDonald's. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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