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How will the job market affect stocks?

by ken | 08:47 in |


How will the job market affect stocks?

The major indices closed mixed last Friday as a week of slow trading was capped by a market-wide selloff on Friday. The retreat was driven by a mediocre June jobs report and fears about a jobless recovery. The S&P closed down only 0.55%, the Dow gained 1.35%, and the Nasdaq rose 0.08%.[1]

The U.S. suffered its third month of sub-100,000 jobs growth in June, adding just 80,000 new jobs. The economy needs an average growth of at least 125,000 new jobs per month in order to be considered healthy.[2] However, let’s take a moment to dig a little deeper and consider what lies behind the jobs numbers each month. One of the complications of calculating jobs growth is seasonality, which economists have to estimate based on their knowledge of annual trends. Currently, we’re in one of the slow periods of the year, when factories slow production and retailers see fewer sales. Economists only expected to see 90,000 new jobs; although we missed that number, the situation is not as grim as it appears.

A more positive indicator that we saw in the jobs report is that the number of temporary workers grew by 25,000, accounting for nearly one-third of the new jobs last month. [3] This is good news because the hiring of temporary workers historically presages that of permanent employees. Hiring full-time employees is a significant investment that businesses may be reluctant to take on in a shaky economy. Temporary employees can fill the gap without a significant investment. As employers become more confident of their own needs and the economy, they often convert temporary employees into permanent staff.[4]

Two more positive indicators could mean that the jobs market is emerging from a spring slump. The number of Americans applying for jobless benefits fell to a three-month low in June, and the number of layoffs announced in June fell to a 13-month low – about 40% less than May’s number of layoffs. Both of these reports indicate that employers are becoming motivated to keep existing employees and reduce layoffs. That plus the increase in temp worker hiring could mean there’s hope for a rosier employment picture later this year.[5]

While the job market and economy are far from healthy and we are unlikely to see the robust employment numbers of earlier this year, we can hope to see moderate employment growth ahead. Falling gasoline prices may increase consumer spending and businesses will see their prospects improve, improving the overall employment outlook. Keep in mind while reading the media’s spin on economic reports that they often tell a small part of the picture. Headlines tend to focus on the worst-case scenario without taking the time to explain the data that can be understood by digging deeper. 

ECONOMIC CALENDAR:
Wednesday: International Trade, EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, Import and Export Prices, Treasury Budget
Friday: Producer Price Index, Consumer Sentiment


Data as of 7/6/2012
1-Week
Since 1/1/2012
1-Year
5-Year
10-Year
Standard & Poor's 500
-0.55%
7.72%
1.15%
-2.30%
3.70%
DOW
1.35%
4.54%
1.16%
-6.17%
36.17%
NASDAQ
0.08%
12.75%
3.65%
2.03%
10.28%
MSCI EAFE
-1.04%
2.15%
-14.76%
-6.07%
 2.38%
10-year Treasury Note (Yield Only)
1.66%
N/A
3.10%
5.20%
4.86%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:
Greek aid halted until austerity back on track. According to an EU finance official, Greece will not receive its next aid disbursement until it continues the implementation of economic reforms demanded by European creditors. Auditors will assess the current state of its accounts after two difficult elections.[6]
Congress passes student loan extension. The House and Senate passed a transportation bill that included an extension of the low interest rates on government-subsidized student loans. The measure passed just days before rates were scheduled to double.[7]
China cuts lending rates again in surprise move. The interest rates cut, the second in less than a month, signals that the world’s second-largest economy could be in trouble and that Communist Party leaders are getting serious about boosting the economy. By lowering borrowing costs for homebuyers and business owners, finance officials hope to increase private sector activity.[8]
Obamacare opponents focus on state exchanges. Critics of the new healthcare act are focusing their efforts on challenging federal subsidies and tax credits in states which fail to set up insurance exchanges and require federal intervention. At issue is the language of the act, which specifies that subsidies are only available for insurance purchased in state exchanges, but makes no mention of federally-run exchanges.[9]

QUOTE OF THE WEEK:
“The two most unnecessary emotions in life are guilt and worry.” – Dr. Wayne Dyer


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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity,  measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops.  The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
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Past performance does not guarantee future results.
You cannot invest directly in an index.
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