Stocks Muted By Poor Jobs Report

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Stocks were sent reeling southward this past Friday as the monthly jobs report was disappointing to say the least, and raised fresh worries about economic weakness and the risk of deflation. The jobs report, which showed non-farm payrolls fell by a larger-than-expected 131,000 last month, added to a stream of economic data over recent weeks that indicate the American recovery continues to weaken, and stoked fears the country could still fall back into a recession. This caused investors to scramble to buy relatively safe Treasury bonds at the expense of equities. Bond yields, which move in the opposite direction of price, fell to historic new lows this past week, although even after all the volatility exhibited throughout the week in the equity markets, stocks still managed to end slightly higher this past week

Despite losing 21 points on Friday, the Dow Jones Industrial Average gained 1.79% over the trading week to end at 10,653.56. This blue-chip index is now up 2.16% on the year. The S&P 500 gained 20 points over the five sessions, or 1.82%, to hit 1,121.64, giving it a slight gain of .59% on a year-to-date basis. The S&P 500 has climbed to the highest level since May after companies from Pfizer, Exxon Mobil to News Corp. beat earnings estimates and other reports showed expansion in both the service and manufacturing industries. Meanwhile the Nasdaq lagged slightly with a 1.5% pop to end the week at a level of 2,288.47 and is now up by 0.85% for 2010. The one index that lagged on the week was the Russell 2000, which gave up 0.03% but is still higher by 4.04% for the year. Stocks have been moving nicely northward since July 12, following better-than-estimated earnings at a host of companies.

In fact, the S&P has gained some 4% since that date, which was the beginning of the earnings announcement season. According to data compiled by Bloomberg, almost 78 percent of S&P 50 companies that have released results since that date have exceeded the average forecast. With respect to the Treasury market, the bond market continues to remain a picture of bearishness. The 10-year Treasury yield tumbled immediately after the release of the jobs data and never looked back, closing at 2.826%, the lowest since April 2009. The two-yield dropped to 0.514%, the lowest on record dating back to 1973. This historic drop reflects expectations that the Federal Open market Committee will take action at this week’s meeting to ease monetary policy further. There is no doubt that interest rates will stay near zero for an even more “extended period,” to use the Fed panel’s favored phrase. Whatever the FOMC’s decision this week, it’s definitely a low-rate world while risks tilt toward continued economic weakness and deflation. Right now, Treasurys are starting to revisit levels seen in the darker days of the credit crisis. Bill Gross, the manager of the world’s largest bond fund, went on record this past week stating that the Federal Reserve is unlikely to raise interest rates for two to three years as it seeks to keep the economy from slipping back into another recession.

Getting back to the jobs report, it’s time to now put to bed the silly notion that the weak labor market is nothing to worry about because jobs are a lagging economic indicator. The simple fact of all this nonsense is that the economy will not and cannot recover until a lot more people go back to work. Whether another round of government stimulus is needed to prod businesses to start hiring again is up for debate. But it’s painfully clear that businesses must add workers for the economy to bounce back. Considering that we lost a whopping 8.4 million jobs during the first phase of this recession, at the current pace of job growth, it would take almost 17 years to get back to where we were before the recession! This week will likely prove to be even more interesting than last week, even for a trading week in August. As you already know, chatter was a flurry throughout this past week that if the Fed doesn’t do something big this week we’re going down big time. So to say that people don’t trust the market right now is a bit of an understatement. Thus all eyes will be on the Fed and whether it takes steps toward “quantatative easing” to address growing concerns about deflation. In addition to the Fed meeting, they’ll be a slew of earnings reports to sparse as well. Some of the more notable corporations set to report include: Kohl’s, Sara Lee, Estee Lauder, Disney, Cree, Cisco Systems, Macys, Nordstrom, Wendy’s and AutoDesk. The other important data point on the week is that of the retail sales tally, coming out on Friday. We should see a continuation of a modest improvement, with the consensus seeing a 0.5% increase. And finally on Friday, we’ll get the latest consumer price index reading which should still be within in the Fed’s comfort zone, although the number will be closely parsed for any hints of deflation. A 0.2% rise is seen by the consensus

Sources:  Barron’s, The Wall Street Journal, The Kirk Report, Kiplinger’s, The New York Times, Associated Press, Reuters, Morningstar

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