The last fortnight must have been an intriguing one for those of you who work in the staffing sector — news flow has remained almost consistently negative, yet many share prices have rallied, with particularly useful gains for Robert Walters, Harvey Nash and SThree. Indeed, as one Scottish-based fund manager admitted to me this morning, “some of us are a little confused as well”.

Starting with the bad news, labour market data for January can only be described as awful. The US non-farm payroll declined by 598,000 (the largest monthly decline since 1972) and job loss figures for November and December were revised even higher. Over the past three months, an astonishing 1.8m people have lost their jobs.

In the UK, unemployment hit 1.97m and pessimists such as Capital Economics (who tend to be quoted frequently in newspaper articles) anticipate a 3.5m peak in 2010. At present, barely a day passes without a company announcing workforce cuts. Recent examples include Diageo, Hyder Consulting, BSS and Hogg Robinson all unveiling “cost-reduction programmes”.

Within the sector, the bleakest comments over the past fortnight have been made by US staffing agencies. Robert Half flagged that activity levels had deteriorated sharply in the first few weeks of January which came as a bit of a shock given that December had been pretty weak anyway. This trend was echoed by Manpower a few days later. However, in the UK, updates from SThree (which is admirably continuing to expand its European office network despite the economic slowdown) and Empresaria were more reassuring.

So why are share prices rallying? For two reasons.

Firstly, companies are often simplistically categorised by the stock market as cyclical or defensive. Cyclical companies tend to be impacted by economic boom/bust to a much greater degree than defensives and, given that it has been clear since late 2007 that we were heading for recession, investors have understandably stuffed their portfolios with as many defensives as possible (driving up their share prices in the process). As we entered 2009, defensives looked expensive relative to bombed out cyclicals.

Secondly, a few forward-looking indicators of economic activity are no longer collapsing. For example, the manufacturing purchasing managers’ index has increased for two months in a row.

The general consensus seems to be that the rally is likely to run further in the short term but very few anticipate a sustained recovery in share prices during 2009.