So far, October has been exactly the opposite of its mistaken reputation as being a month to fear. If the Dow Jones Industrial Average went nowhere until November, October would be the second-best month for the market so far this year.
This month's nearly 500-point gain has offered an important lesson in reading the market's tea leaves and acting accordingly. It also may have provided additional evidence to show that anytime you question the market's judgment, usually you should be questioning your own instead.
For many months the standard economic commentary included a foreboding warning that despite improvement in many economic data, employment was a serious concern.
But despite the onslaught of ominous employment warnings, the market moved higher. The movement was not without a few hitches along the way, but stocks clearly had an upward bias.
Some analysts rationalized the market's stubborn refusal to heed all the employment warnings by offering two explanations: Either the market was simply thriving on its own momentum, or it was willing to wait for employment improvement far longer than normal. Not many were willing to concede that the market was correctly forecasting employment gains that most economists felt either would be anemic or non-existent.
The market, as usual, was correct.
September's employment report showed an increase of 57,000 in non-farm payrolls that was spread throughout the economy. But doubts persisted that perhaps this report was an anomaly that soon would be corrected in other employment-related data. Two weeks ago, a drop in new unemployment claims got a positive reaction, but to a degree, this also was taken with a grain of salt. Last week's report, however, was not.
New unemployment claims fell 23,000 to an eight-month low while continuing claims also were lower. The market immediately ran up to a new recovery high. The market's steadfast unwillingness to accept what some people felt was an obviously worrisome employment picture should have been a huge warning sign -- not to pay attention to people issuing warnings.
Any time the market seems to be at odds with the wisdom of the consensus is a time to look beyond the obvious. The frequency and popularity of the employment concerns were strong clues that acting against this tide of opinion might make sense.
Even with the recent string of better employment reports, however, you cannot assume that employment will continue to get better. Your best guide to what employment conditions could be once again will be the market.
After running up based on the improved data, if the market suddenly sours (most likely while numerous people climb on the happy-days-are-here-again bandwagon), be wary. It could be telling you that all it did in September and early October was discount an interim but not lasting improvement.
Your best ally in coming weeks might be the same chorus of voices that missed the recent employment improvement. If you continue to hear that employment will not improve and the market keeps moving higher, once again you probably should ignore the warnings.
This brings to mind the old line: My way or the highway. In a market reference, you most often are best served by doing things the market's way. All too often any other way leads your portfolio down a pothole-strewn highway to an unwelcome destination.
After the recent market move, profit taking can be a temporarily inhibiting factor, and institutional tax selling later this month also could be an issue that briefly interrupts the current improved psychology.
So far at least, however, October's market activity is suggesting that still better economic conditions are not far off.
Gregory M. Drahuschak is first vice president of Janney Montgomery Scott Inc., Pittsburgh.
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