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A Horrible Jobs Report

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Before you start reading this week’s blog – PLEASE READ MY LATEST US NEWS AND WORLD REPORT COLUMN.  

It’s amusing and instructive with facts about market corrections and behavior.  It ties in a good Seinfeld episode too.

If there was any doubt, Friday’s disappointing labor report is one of the signs that the U.S. economy appears to have entered “Growth Problem 3.0” – a 3rd slowdown in growth in as many years.  In addition to the jobs report, signs of Growth Problem 3.0 include the near 10% decline in the Standard & Poor’s 500, the continued decline in commodities process, and the looming Fiscal Cliff.

Here’s how the market ended up for the week.

Weekly 6-4-12

I want to provide a recap of the horrible job numbers from Friday which sent investors rushing out of stocks and commodities and into the perceived safety of Treasuries.

First, the unemployment rate moved up from 8.1% in April to 8.2% in May. Second, and more significantly, nonfarm payrolls rose a miserable 69,000 last month.  That ended up being less than half the analysts’ forecasts while April was revised from 115,000 to 77,000.

What does that mean?  It means businesses don’t have the growth opportunities that would require a significant number of new employees.

Here’s how the graph looks over the past 3 years…note that employment comes back and there are no recessions in 2010 or 2011.

Jobs 6-4-12

Meanwhile, Europe continued to impact the U.S. markets, except this time Spain was replacing Greece as the source of worry. The growing lack of confidence in Spain’s perceived inability to recapitalize its banks is resulting in ever-increasing yields on its government debt. That means it becomes more expensive to borrow, and this feeds the fear.

If you extrapolate this out (my apologies to fellow Artillerymen who are having TFT nightmares at that very word) there are fears that this could spread to Ireland, Portugal and Italy.  The problem is that this places the survivability of the euro in doubt.

So, what do you get from all that? Boom – weakness in equities because it increases the possibility of a sharp euro-zone recession, which would hurt earnings of U.S. firms that do business in Europe. It could also impact U.S. financials.

Worries about the global economy have done damage to commodities, including oil. The good news is drivers are benefiting from the falling gasoline prices just as the summer driving season begins.

Given all of this, there is a lot of pressure on Fed Chief Ben Bernanke.  He will testify on Thursday before a congressional committee on the economic outlook, the latest job report, and on Europe.  It will all get plenty of air play.

What should you do?  Unless your need for short-term liquidity has changed, you should likely do nothing right now.  AGAIN PLEASE SEE MY LAST US NEWS AND WORLD REPORT COLUMN. 

My patience has been rewarded twice before on slowing growth and I’m going to stick to my guns until I see growth slowing so much that it’s looking like a recession.  And right now, I don’t see the “R” word happening.  Gross Domestic Product (GDP) is probably going to be ratcheted down from 2.5% to 2.0% over this week, and 2.0% is a long way from zero or negative numbers.  I’m not saying it can’t happen, I’m just saying that I don’t see it yet.

And don’t discount the possibility that European politicians could craft a headline that would provide support in the markets. They’ve done it before.

Remember – volatility can send stocks in either direction.  Does everyone remember last year?

IMPORTANT NOTE: Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at info@monumentwm.com.

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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