Why the Triple-Digit Drop In The Dow?

Wall Street woke up on the wrong side of the bed yesterday morning, opening down 170 points after the Federal Reserve announced that it wouldn’t pursue another round of Quantitative Easing in the immediate future because inflation appears to be under control. Investors have become used to the Federal Reserve’s periodic monetary stimulus packages, so this announcement knocked the wind out of some sails.

However, I think that this is an overreaction; judging from this grumpy response, you wouldn’t believe that we received great news on the labor market. The morning also brought the ADP payroll report for March, and the results were encouraging. In total, private employers added an estimated 209,000 jobs during the month. This follows a 230,000 gain in February. The biggest gains were made across manufacturers and construction companies, which added 45,000 jobs; factories also increased payrolls by 23,000.

Now, there’s a reason that I look at payroll gains so closely: I considered job growth the spark that revs up the U.S. economic engine. Basically, when jobs are created, this leads to wage gains and puts more money in the pockets of American consumers. This leads to increased consumer confidence and ultimately more consumer spending, which accounts for just about 70% of the economy. So, any payroll gains like this are big news, and should not be glossed over.

On Friday, we’ll get the March unemployment rate report, which is a real market mover. Economists expect the unemployment rate to hold steady at 8.3%, but the ADP report is a good sign that we’ll see improvements on that front.

The fact is that although the Fed’s easy-money policy is a short-term pacifier, investors should move away from relying on it and instead focus on the primary economic indicators. Now that the job market is accelerating, we should see a domino effect of other economic indicators improving as well. So, I’m not overly worried about today’s dip. It’s only a matter of time before investors set their sights on what really matters.