Why the Dow's Rising in Spite of Unemployment Rising

The Dow Jones (INDEX: ^DJI  ) is on pace to not only have its best day in over a month, but to erase four straight days of losses. As of 2:45 p.m. EDT, the Dow's up 1.81% to 13,111. Beyond the Dow, the S&P 500 (INDEX: ^GSPC  ) is up 2.03%, while the Nasdaq (INDEX: ^IXIC  ) rocketed forward 2.28%. What's the optimism washing over markets that stands ready to erase nearly a week's worth of losses? Rising unemployment, naturally.

While the fact unemployment rose and markets are jumping for joy might confuse a more than a few people, here are a couple things to keep in mind:

  1. Day to day, the market's actions don't always make sense. Noise and sentiment can drive markets for long time periods, especially when the overriding storyline right now is whether entire nations stand ready to default.
  2. Payroll numbers have been really soft recently, dipping below 100,000 jobs added a month since April. Right now, the key focus isn't looking for signs of huge optimism, but of the job market "not getting any worse." And while the total unemployment rate rose, July's job growth was a marked improvement over previous months. Remember that day-to-day market moves are driven by how events perform relative to expectations, and the expectation was that the U.S. economy would only add 100,000 jobs in July, a number it handily beat.

Month

Payroll Growth (jobs added)

January 275,000
February 259,000
March 143,000
April 68,000
May 87,000
June 64,000
July 163,000

Source: BLS. May and June numbers were revised in July announcement.

Investors might be confused as to how the unemployment rate rose at the same time 163,000 Americans were added to payrolls. The answer to this question lies in the fact that unemployment rates come from a different survey than payroll growth. Although payroll growth and unemployment usually move in the same direction, it's important to remember a couple of things: We're working with samples, not measuring identical measures. These are very large samples -- the unemployment survey measures 60,000 households -- but samples nonetheless. That can create noise between rounding errors on tenths of percentages. Also, the unemployment measure includes farm workers, and nonfarm payrolls do not. With droughts affecting the country, this distinction becomes important.

But that's confusing, and the bottom line is that few, if any, know what's driving the difference between the two numbers. However, given the choice between rocketing upward on payroll growth that beat expectations, or taking a thoughtful pause to look at the difference between unemployment, the market did what it often does and moved in an outsized way on the news.

On to the markets
While the broader market can be puzzling from day to day, as we chew through earnings season, we get a better picture of which companies are built for the long run.

One company in particular that's soaring today is LinkedIn (NYSE: LNKD  ) , which is up 15% after impressive earnings. The social networking site is often derided for its sky-high P/E, which is so high (the company has $13 million in earnings in the last year and is worth more than $11 billion!) it's meaningless. However, that sky-high P/E comes from a business that has powerful growth in front of it. In the just-reported quarter, LinkedIn saw revenue grow more than 88% from the last year. LinkedIn might not be the choice of any value investors, but it's showing what a non-ad model can do for social networking sites.

Looking at the broad-based index, the Russell 2000, the market's biggest winner is Knight Capital, which rebounded 55% today. The problem? The company is still down a staggering 74% in the past week after a trading algorithm mishap at the company caused market havoc earlier this week. Blue Nile (Nasdaq: NILE  ) comes in second among today's winning stocks. The company is up 35% on an earnings beat and upped its forecast.

Take the long-term view
That's it for today's market recap. If you're looking for companies that can profit through thick and thin, the best place to start is with solid blue chips with a global influence that can be found on the Dow Jones. To discover three companies our analysts believe are set to outperform in the coming years, check out our newest free report: "The 3 Dow Stocks Dividend Investors Need." You can download it now, for free.

Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Linkedin. Motley Fool newsletter services have recommended buying shares of Linkedin and Blue Nile. Motley Fool newsletter services have recommended creating a position in Blue Nile. The Motley Fool has a disclosure policy.

We Fools may not 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.


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