The stock market sank to new lows for the year as equities posted a second week of big losses. Investor sentiment has been souring as more and more economic data disappoints. Fears of a double-dip recession are mounting. The major market indices have broken down under key support levels, suggesting we are headed for another leg lower.
The non-farm payrolls (jobs) report on Friday was the big event for the week. Economists were expecting a loss of -110,000 jobs thanks to the government shedding more than 300,000 temporary census workers. The headline number was actually -125,000 jobs. Essentially the government only laid off -225,000 census workers. The key component Wall Street was watching is the private sector job growth. Analysts were expecting a gain of +112,000 new jobs in the private sector. The June jobs report only showed +83,000. While this is disappointing it is a lot better than May's +33,000.
The jobs report doesn't seem that bad does it? Unfortunately details surrounding the jobs report were all negative. Average hours worked every week fell to 34.1. If businesses are going to hire more people we need to see this number climbing. Before a manager goes through the hassle and expense of hiring someone new they are going to give their current staff more hours. Besides, +83,000 jobs is not going to cut it. We need around +150,000 private sector jobs a month just to keep up with population growth and immigration.
Another key detail in the jobs report was the drop in the unemployment rate from 9.7% to 9.5%. This is a deceptive move. The decline occurred because the labor force got smaller as more than 650,000 people gave up looking for work. That's certainly going to have a negative impact on consumer spending but more on that later. Overall the underemployment rate, which counts the unemployed (14.6 million in June) plus the people who are working part time but really want full-time work (11.2 million), has risen to 16% or almost 26 million people. At the current rate of job growth it is going to take several years before we get back to normal unemployment.
There has been talk of businesses picking up the slack as consumer spending stalls. I doubt that will happen. The inventory build out is slowing down. As a matter of fact the inventory replenishment cycle was a lot stronger than expected in the last two quarters and economists are expecting this to have a smaller affect in the second half of 2010. Plus, big and small businesses are facing new taxes in 2011 and corporations are still trying to figure out how much the new healthcare reforms are really going to cost them (another reason to not hire anyone new).
The secondary economic report on Friday was the factory orders number. Economists were expecting a drop of -1.0%. Factory orders for May fell -1.4%. This is a lagging report and only confirms the slowdown in manufacturing.
Technically the market looks really ugly. I feel like we've been talking about a breakdown in the major averages for weeks now. Now that the breakdown has finally happened there isn't a lot to say that hasn't already been said. The S&P 500 will probably see a bounce near the 1,000 level but I expect the index to slowly work its way lower toward the 950 area or possibly the 880-870 zone. The bearish head-and-shoulders pattern on the S&P 500 would suggest a decline toward 860 over the next few months. One is for sure, stocks tend to fall a lot faster than they climb. At the same time this move isn't going to happen all at once. We will see rebounds. Unfortunately bear-market rebounds tend to be very sharp. Now technically we're not in a bear market yet. The market needs to fall -20% from its highs. As we see the S&P 500 near the 975 level you'll probably hear a lot more media coverage about the "new bear market" in stocks.
Daily chart of the S&P 500 index:
Daily chart #2 of the S&P 500 index:
Weekly chart of the S&P 500 index:
At the end of the day I don't see any good reasons for investors to be buying stocks, especially not with a double-dip recession looming ahead of us. Think about the environment we are in. The residential real estate market is crumbling again with expectations for another -10% to -20% in prices. There are millions in foreclosures still to come. Commercial real estate remains soft. The labor market is struggling to create jobs. The government stimulus is due to expire at the end of this year. Manufacturing is slowing down. Europe's debt crisis remains unsolved. Plus we're facing a wave of new taxes next year. No wonder consumer confidence is plunging. You've heard it before consumer confidence is supposed to help forecast consumer spending. Consumer spending accounts for nearly 70% of the U.S. economy. As consumer spending stalls we can expect economic activity to slide.
On a short-term basis stocks are oversold. We could see a rebound soon. Plus there is the possibility that Q2 earnings results might spark some buying interest. Yet I suspect any rally will be short-lived. Investors are looking six-to-twelve months out and the picture is pretty muddy. What is the one thing that Wall Street hates the most? It is uncertainty. The only thing that might be able to turn this market around would be a parade of positive earnings guidance. If corporate America can offer positive guidance and raise their estimates then we could see a significant rally. Sadly, that's probably a day dream given the slowing economic data. We'll have to wait and find out as Q2 earnings season arrives in about two weeks.
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in late 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures.
Estimates were in the 3 to 5 million foreclosures over the next three years but a White House advisor was quoted with estimates in the six to ten million range over the next three years. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown