For years, the unemployment picture has held back optimism about the economy's recovery. Even as the stock market soared and companies saw greater business activity, the inability of the economy to produce ample numbers of jobs weighed on sentiment. That's why today's report from the Bureau of Labor Statistics that the U.S. economy produced 165,000 new jobs was so important, and because the number beat expectations by about 25,000 jobs, markets soared. The Dow Jones Industrials (DJINDICES:^DJI) soared 172 points, surpassing the 15,000 mark, by 10:55 a.m. EDT. The S&P 500 (SNPINDEX:^GSPC) followed suit with an even larger percentage gain that sent the index above the 1,600 level for the first time ever.
Clearly, investors see the jobs report as evidence that the economy has turned the corner. The fact that cyclical giants Caterpillar (NYSE:CAT) and General Electric (NYSE:GE) are among the Dow's biggest winners today -- they have gained 3.1% and 1.8%, respectively -- shows the extent to which people are banking on an economic recovery, not only in the U.S. but also in harder-hit areas of the world such as Europe. Both Caterpillar and GE need a marked improvement in global conditions to support their stock prices. Given the importance of the U.S. in the overall global economy -- especially on the consumer front, which is arguably most directly tied to employment conditions -- it's reasonable to conclude that better domestic jobs numbers will support economies worldwide.
However, keeping perspective is important. In the grand scheme of things, 25,000 extra jobs isn't enough to justify such a huge stock-market move. Rather, it's the assumption that employment growth will continue that's driving stocks to new record highs. Yet as recently as last month, a weak jobs report threw cold water on that theory, calling the entire recovery into doubt.
Moreover, investors must not ignore the difficult path ahead of returning economic policy to normal. Around the world, central banks have supported markets with low interest rates and other stimulus measures, with India joining the parade earlier today by cutting rates by a quarter-percentage point. The big question for the future is how markets will respond when those extraordinary measures start to disappear, and the challenge for central banks will be to withdraw from programs like quantitative easing in an orderly and deliberate manner to avoid any mass exodus from the stock and bond markets.
Today's jobs report had some good news for those who have suffered from unemployment and underemployment. But it's far too early to conclude that the report marks a permanent increase in the pace of job creation, and until that comes, the stock market appears to be getting way ahead of itself. If future news contradicts the rosy picture that investors see now, the markets could quickly reverse their recent gains.