On Friday June 7, the U.S. unemployment rate rose from 7.5% to 7.6%. The DJIA responded by jumping 207 points, its second best day of the year. Analysts attributed the result to a “Goldilocks” situation in which the job number was “just right”—not too cool to suggest a slowing economy, yet not so hot the Fed might dial back its bond buying program which keeps interest rates down.
BusinessInsider.com said, “This is great news for the market. You get solid job creation, meaning the economy is on track, and yet there’s no tightening in unemployment which would force the Fed’s hand on quickly tapering QE (quantitive easing, the bond buying program).”
According to the Wall Street Journal, “For weeks, investors had grown increasingly nervous about the near-term course of Fed policy. Friday’s jobs report was seen as a potential turning point for the Fed if it showed the labor market was improving faster than expected… in this environment, investors found themselves in the peculiar position of viewing strong news on the economy as a negative because it increases the odds the central bank would make good on its intention of paring back on the aggressive efforts to ease monetary policy.”
But while everybody remembers the “just right” porridge that Goldilocks enjoyed in the fairy tale, the rest of the story is a cautionary lesson. After enjoying the porridge, home invader Goldilocks trashed the house by sitting in Baby Bear’s chair and breaking it. She then went upstairs and passed out, once again choosing Baby Bear as her victim when she fell asleep in his bed. A short time late the bears came home and found Goldilocks still asleep in Baby Bear’s bed; when she woke up and saw the three large and angry animals she ran screaming out the door.
Similarly, a view of today’s market that assumes everything is going to be all right is unlikely to have a happy ending. We like best the Seeking Alpha take on the story: “In our version of the classic fairy tale the porridge and beds may look a little different, but the risk of the bears coming home is still very much there. This is the story of how this time around Goldilocks can see the bears coming home from a mile away.”
Columnist Dallas Salazar goes on to explain that his three bears are “QE and the threat of tapering, the economy in general, and finally Japan and its plans to weaken its currency and reach an inflation target of 2%.” Each has the potential to give the market an unruly wake-up call and send novice investors screaming into the woods, like Goldilocks, while educated traders once again find opportunity in market volatility.