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Why the Glowing Jobs Number Was No Surprise

Most investors believe that the economy leads the stock market, but it's the other way around

by Bob Stokes
Updated: March 13, 2017


[Editor's Note: The text version of the story is below.]

On March 10, the U.S. Bureau of Labor Statistics reported that the U.S. economy added 235,000 nonfarm payrolls in February.

The jobs number was significantly higher than expectations, and at least one publication attributed the higher number to the new president (Business Insider, March 10):

Trump's first jobs report crushes expectations

But improvements in the economy were in the cards long before Trump was elected. Here's what our June 2016 Elliott Wave Financial Forecast had to say:

Since stocks lead the economy, a rally by the major U.S. averages will likely be followed by an upward blip in at least some major economies.

Nine months ago, when that issue of the Elliott Wave Financial Forecast published, the DJIA traded at 17,838. On March 10, the index closed at 20,902. The economic numbers followed higher. In fact, they’ve been following the stock market since it bottomed back in March 2009. Back then, if you remember, it was the stock market that reversed upward first, and the economy has been playing catch-up ever since.

That was not an isolated incident. Many people believe that it's the economy that leads the stock market. But, history shows that the opposite is true. Take a look at this chart:

As you can see, every major recession and depression was preceded by a significant drop in the stock market.

During the last financial crisis, if you recall, stocks topped in October 2007, a year before the economy fell off a cliff.

This seems counterintuitive, but we have a good explanation. The stock market reflects society’s overall mood; we call it, social mood. Falling stocks indicate a negative reversal in social mood, which eventually translates into worried business owners being less inclined to hire, or even implement layoffs. On the other hand, when stocks are rising, people are in an upbeat mood and more apt to hire and expand their businesses.

So it normally takes months for the economic indicators to follow the stock market, up or down. A classic Elliott Wave Theorist explains why:

Economic trends lag stock market trends because the consequences of economic decisions made at the peaks and nadirs of social mood take some time to play out.

In fact, financial downturns usually start when the economic picture looks good. Consider that the nation's GDP grew 4.8% during Q3 of 2007, just before the historic October 2007 stock market top.

But the GDP expansion at that time was not an indicator for the stock market. In fact, stocks fell about 50%, despite the strong economy that preceded the October 2007 peak.

This is important for investors to know because the next downward financial turn will probably again occur when the economic data is looking good.

Yet, there is a high-confidence way to anticipate the market's next big turn, and that's by keeping on top of the market's Elliott wave pattern.

Right now, that pattern is giving us a good idea of how much longer this current rally is expected to last.

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