The downside of optimism

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From Times staff writer Walter Hamilton:

Optimism helped sink the stock market this morning.

The economy shed fewer jobs than expected last month, but equities sank anyway as the Dow industrials plummeted more than 270 points.

The sharp rise in oil prices for the second day in a row certainly did its part in hammering the market, as did the unanticipated spike in the unemployment rate, which was the largest in 22 years.

But investors usually brush aside the jobless rate itself and place far more emphasis on how many jobs were created or lost.

Employment rolls declined by 49,000 in May, the fifth straight monthly drop. But economists had expected a loss of 60,000 positions, meaning the result was slightly better than expected.

So why is the market selling off so brutally?

In part because growing numbers of investors had bought into the notion that the economy was turning a corner and would provide a prop for suddenly endangered consumer spending.

The enthusiasm was fanned by a drop in first-time jobless claims reported Thursday. Whisper numbers buzzing around Wall Street envisioned only moderate job contraction.

That thinking had lately helped propel traditional early-cycle sectors – primarily transportation stocks and small-cap names. Investors scurried to place their bets before the putative economic upturn became widely apparent.

As it turns out, there was no need to rush in.

Losses were broad-based among employment categories, with little to feel positive about.

That reinforced fears that falling housing prices and rising gas prices will have plenty of company in coming months in the form of increasing job losses.