Scary May Jobs Report Could Still Be a Negative for Stocks
The scary drop in jobs growth will have markets fretting in the week ahead, as investors debate whether the economy is temporarily stalled or ready to hit the skids.
With just a few major data points, the focus will also be on the Fed, which winds down its quantitative easing program at the end of the month. The string of weak data, culminating with Friday's May jobs report, has Wall Street speculating the Fed could be ready to dig in and provide more stimulus to the markets, though Fed watchers, for the most part, doubt it. Fed Chairman Ben Bernanke speaks on the economy Tuesday afternoon, and a handful of other Fed officials speak throughout the week.
"I don't think we're on the cusp of any big policy change. I think the bar is very high for going back in the other direction, but it will be very interesting to see what he has to say about things. There's a big debate about whether what we're seeing right now is the beginning of a sustained slowdown or just (the effect of) short-term factors," said Stephen Stanley, chief economist at Pierpont Securities.
Friday's jobs report showed a rise in unemployment to 9.1 percent and job growth of just 54,000, about a third of economists' consensus forecast and well below April's revised. It is the latest in a series of disappointing reports that have been showing a slowdown across the economy—in housing, manufacturing, the consumer and employment.
Stanley and many other economists think the dip is temporary, and it will reverse as the effect of the Japanese earthquake-related manufacturing slowdown lessen,s and consumers adjust to now-falling gasoline prices. "I do worry though. I do think animal spirits are rather fragile, and it would not take a lot for something that started out as a temporary situation to morph into something more worrisome," Stanley said.
Stocks saw a fifth week of losses, with the Dow down 2.3 percent at 12,151, its longest weekly losing streak since July, 2004. The S&P 500 tumbled 2.3 percent to 1300, in its biggest weekly loss since last August. As stocks traded lower, the yield on the 10-year in the past week slid below the key 3 percent level and touched 2.944 percent Friday. The dollar index, meanwhile, was at 73.70, down 1.6 percent for the week, and the dollar was down 2.2 percent against the euro (1.4634).
"I think it's really going to be about psychology next week. The headlines over the weekend are going to be that there's no jobs growth. There's going to be the push-pull of 'is it transitory and a soft patch or something bigger?'" said Scott Redler of T3Live.com, who looks at the market's short-term technicals.
"Today we held 1295 (on the S&P 500), but I don't think that's the level that's going to hold for the summer. I think we could have a retest of the 1250/1255 low, from when the Japanese earthquake hit. That should be the level that holds," he said. "We're oversold now, but we're not technically oversold. We're about 5.5 percent off the highs, but there's no reason we can't be 7 to 10 percent. We have QE2 (quantitative easing) ending and so much else happening that makes me think nobody's going to step in front of this when they can come in at lower levels."
Europe will also stay in the headlines as Portugal holds weekend elections, and the European Central Bank meets on interest rates Thursday. One positive is the apparent progress being made toward a new Greek aid program and comments from the EU and IMF that Greece would receive the next payment in its existing program in July.
OPEC also meets in Vienna Wednesday, and there's some talk it could consider raising oil production to make up for lost Libyan output. John Kilduff of Again Capital doubts, however, that OPEC will change quotas or targets.
"Given that Saudi Arabia is thought to be unhappy with the U.S. over the handling of the Egyptian situation, the hawks within OPEC, such as Iran and Venezuela, are likely to have a much freer hand to fashion policy and a statement that will have the cartel monitor market conditions, seeing the market as well supplied, and not seeing any need to put more oil on the market," Kilduff notes. Oil was down 0.4 percent on the week, finishing at about $100 a barrel.
'One-timer' reasons underlie 'soft patch'
Leo Grohowski, BNY Mellon Wealth Management chief investment officer, believes now is a time for caution, but he expects the S&P 500 to be in the 1400s by year end. "We've been warning investors that for at least the next couple of months, the market is going to remain choppy. I think it would easily be back to one step forward, two steps backward for awhile. I think the markets are going to remain tentative," he said. He said he favors economically sensitive sectors like energy and technology, combined with defensive sectors, like health care.
"Stocks are clearly declining for what is no doubt a worsening outlook for economic growth. There's no doubt that the outlook for U.S. and and global economic growth is more challenged than it was a few months ago. The underlying reasons of the soft patch are sort of one-timers. They're more explainable specifically," said Grohowski, noting the supply chain disruptions from the Japanese earthquake and the jump in oil prices.
"We're still believing that there's a less than 10 percent chance of a double dip in here. Another important thing is credit markets are obviously in sound shape. That's been a big change over the last couple of years," he said.
In addition to the economy, investors have become concerned about the debt ceiling debate in Washington and the growing federal deficit. "I think if investors are digesting the news flow it's hard to get enthused about not only the markets but the state of our nation. As we talk to investors, they just have the feeling that we're not in a good place as a country right now," he said.
"There's a lot of angst...and I get that. It's real. We've slowed. No doubt. But as a stock market investor I've been looking at consolidation going on since February," said James Paulsen, chief investment strategist at Wells Capital Management. "The market's been flat and trending sideways since February and I would argue during that consolidation period, we've done a lot of renovation." He said some positives include the decline in oil and other commodities prices, improved business lending, and lower interest rates.
Like many, he believes the softness in the economy is temporary and that sub-3 percent growth will disappear as the year progresses. "I think we have a good shot at being in the (S&P) 1400s before the year is out. Whether that takes off soon or doesn't take off until September, I'm kind of indifferent about that. I can see the negatives are going up here today, but to me that's maybe a good time to buy. It could be a sloppy summer, but you could miss what I think could be some good returns for the year," he said.