MarketView for May 4

Summary

 

Wall Street ended its worst week this year with a sharp selloff on Friday after a slowdown in job creation in the world's top economy raised the biggest question mark yet about the prospects for GDP growth.

 

Employers reduced hiring for the third straight month, adding 115,000 workers in April, well below forecasts of 170,000.

 

Energy shares were the worst performers on fears a worsening economy would sap demand. Crude oil fell 4 percent, dropping below $100 a barrel for the first time since February.

 

The sharp retreat this week disappointed the minions who had been hoping the S&P 500 would break out to new recovery highs. The index is now moving away from strong resistance at the 1,400 level after failing to make a convincing move above it. For the week, the S&P 500 lost 2.4 percent, its worst weekly performance since December.

 

The Street was also particularly cautious ahead of elections in France and Greece over the weekend as European policymakers struggle to bring an end to their debt crisis and people rebel against the strain of austerity measures.

 

The utility sector, considered a defensive play, was the only S&P 500 sector in positive territory, up 0.2 percent. Shares of CenterPoint Energy led the parade, up 1.7 percent to close at $20.05.

 

The selloff came on the highest volume in two weeks. Around 7.02 billion shares changed hands on the three major equity exchanges, above the daily average of 6.76 billion shares.

 

In the oil sector, Chevron fell 2.1 percent to $103.72 while Exxon Mobil slipped 1.3 percent to $84.57. Both ranked among the Dow's top losers, along with other big names in economically sensitive sectors.

 

With this week's retreat, much of the S&P 500's gains from the move off the April closing low at 1,358.59 have been erased. The market has found support around that level in the past, but a breach there could take it back to 1,340.

 

Also dampening the mood on Friday, surveys showed the euro zone's economy worsened markedly in April and suggested a recession may be deeper than previously thought.

Russian shares plunged 4 percent, wiping out this year's gains in the benchmark MICEX index, as demand for risk assets waned and oil prices hit the ruble currency. The Russian stock market is the only one of the BRICs countries to be in the red for the year.

 

Among individual stocks, LinkedIn was up 7.2 percent on the day to close at $117.30 after the social networking website raised its outlook and smashed revenue and profit expectations.

 

First Solar fell 6.3 percent to $16.94 and was the largest decliner in the Nasdaq 100. The Company posted an unexpected quarterly loss on Thursday, prompting the Street to lower its price targets.

 

Estée Lauder fell 5.3 percent to $60.72 after the company projected earnings that disappointed Wall Street. Dole Food said it may spin off one or more units, sending its shares up 7.7 percent to close at $9.39.

 

Of the 415 companies in the S&P 500 index reporting results, 67.5 percent have exceeded estimates, according to Thomson Reuters data through Friday morning. That is a sharp decline from the start of earnings season when more than 80 percent of companies were exceeding forecasts.

 

Unemployment Falls but Hiring Slows

 

Unemployment fell to 8.1 percent in April, the lowest since January 2009, the Bureau of Labor Statistics (BLS) reported Friday morning. Meanwhile, nonfarm employers added 115,000 jobs to their payrolls in April, according to a survey of businesses that is different than the household survey that generates the unemployment rate.

 

That job growth was lower than the consensus expectation of170, 000 new jobs. However, at the same time, the BLS revised upward the number of jobs that were created in February and March, adding about 53,000 additional jobs to payrolls.

 

About 12.5 million people are still unemployed, and a record 88.4 million people are considered "not in the labor force," according to the BLS. The labor-force participation rate -- the percentage of the work-age population either working or looking for work -- dropped to 63.6 percent, the lowest since December 1981.

 

"Much more remains to be done to repair the damage caused by the financial crisis and the deep recession," wrote Alan Krueger, chairman of the White House's Council of Economic Advisers. "It is critical that we continue the economic policies that are helping to dig our way out of the deep hole that was caused by the severe recession that began at the end of 200," he wrote.

 

Critics on the left, such as Princeton economist Paul Krugman, have argued that the Obama administration has not done enough to spark demand, while critics on the right, including Romney, argue the administration has hindered the recovery with too many regulations. Many economists tend to believe such a sluggish recovery was perhaps inevitable following the bursting of the housing bubble and a severe recession.

 

"While some would like to attribute the lack of hiring to uncertainty and regulatory roadblocks, the fact is that demand for goods and services simply has not reached a level that warrants accelerated hiring," John Challenger, CEO of consulting firm Challenger Gray & Christmas, was quoted as saying. "In areas, where demand has improved, so has hiring."

 

Whatever the reason, payrolls are still nearly 5 million jobs lower than they were when the recession began. This labor-market recovery has been arguably the most sluggish since World War II, although the job losses in the recession were also the deepest.

 

More than 5 million people have been unemployed for 27 weeks or more, and the average length of unemployment is more than 39 weeks, according to the BLS. Many workers are leaving the labor force because of retirement or to collect Social Security disability checks. But an untold number have simply given up looking for work after long months or years of unemployment.

 

A broader government measure of unemployment, which includes people described as "marginally attached" to the labor force -- people who have given up looking but would still like a job, or who are working part-time because they can't find anything better -- held steady at 14.5 percent.

 

The situation is worse for African-Americans, with a 13 percent unemployment rate, and teens, with a 24.9 percent unemployment rate. The unemployment rate is 13.2 percent for Americans aged 20 to 24, suggesting a particularly tough job market for college graduates.

 

It does not help that monthly job gains have slowed in each month of the year, from 275,000 in January to 259,000 in February and 154,000 in March.

 

However, the unusually warm winter weather made hiring stronger than usual in the winter months, pulling activity forward from the early spring. Recent disappointing job numbers are therefore partially the earlier months' strength, in other words. Therefore, it is likely that job growth will recover once the effects of the weather are absorbed.

 

The three-month average of job growth has been 176,000 jobs per month, a number that should be more than enough to keep unemployment from rising; but given the deep hole the job market is in we are still facing an upward slog to return to prerecession levels.

 

Nonetheless, retailers did add 29,000 jobs, while temporary services added more than 21,000 workers. An increase in temp workers is sometimes a sign that businesses are getting ready to make more permanent hires.

 

The average length of the work week was flat at 34.5 hours, while average hourly earnings rose by just a penny to $23.38. Over the past year, hourly earnings have risen by just 1.8 percent, the BLS said -- not even enough to keep up with inflation.

 

Are We Headed for Declining Economic Growth

 

Concern the U.S. economy was heading for another summer swoon was mounting even before Friday's disappointing jobs data.

 

Economists are increasingly predicting 2012 will be another year when growth struggles along at about 2 percent.

 

The United States is holding up better than Europe, where several countries have slipped back into recession. And there are signs of resilience in some measures of the economy, especially the manufacturing sector. Still, while American consumers increased their spending in the first quarter, growth in incomes is lagging, suggesting something has to give, and businesses began cutting investment earlier this year.

 

And uncertainty about the outcome of the presidential and congressional elections in November, coupled with the risk of a big hit from tax hikes and spending cuts set to take effect in 2013, may cause shoppers and employers to pull back.

 

Fear hasn't quite gripped the financial markets yet. Stocks fell on Friday, but the benchmark S&P 500 remained up a healthy 9.2 percent this year. Some say that optimism is misplaced.

 

Add in the risk that Europe's debt crisis deepens, which would hurt not only U.S. exports but also American banks, and annual growth of around 2 percent or less in 2012 may be the best anyone should hope for

 

The data could also persuade the Federal Reserve, which expects growth to land somewhere in a 2.1 percent to 3 percent range this year, to launch a third round of bond buying in the hope of further lowering rock-bottom borrowing costs. The Fed has poured more than $2 trillion into the financial system already through bond purchases. That has helped lower long-term interest rates and added fuel to a market rally.

 

Data on Friday showed the economy added 115,000 new jobs in April, far fewer than expected on Wall Street and a further slowdown from disappointing gains in March. Employers added more than 200,000 jobs a month from December through February, leading markets to hope the economy was finally turning a corner.

 

Not everyone has given up hope. The consensus among Wall Street economists before Friday's report had the economy expanding at about 2.2 percent between April and June, matching the first-quarter pace.

 

Recent data has indeed painted a mixed picture. This week alone, reports on one hand showed growth in manufacturing and a decline in new applications for unemployment benefits while on the other hand there was a sharp weakening in the service sector and the decline in hiring.

 

Many economists, including Fed Chairman Ben Bernanke, have said an unseasonably warm winter may have driven the quicker pace of hiring at the start of the year.

 

Still, even at a rate of 250,000 new jobs a month, it would take about eight years to roll unemployment back to the 5 percent rate that prevailed at the end of 2007.

 

One reason the economy may struggle is that wage growth simply isn't keeping pace with consumer spending. Adjusted for inflation, personal income grew at a slender 0.4 percent rate in the first quarter, while consumer spending, which accounts for about 70 percent of economic activity, rose 2.9 percent. That means consumers are not doing much saving, which can't continue if incomes remain stagnant..

 

To complicate matters further, a host of temporary tax cuts on income, dividends, payrolls and capital gains are set to expire on January 1, the same day automatic spending cuts would come into effect and extended unemployment benefits would end.

 

This "fiscal cliff" poses a big threat to the economy. If Congress does nothing, Nomura Securities estimates the measures could drain more than $1 trillion of stimulus from the economy, enough to plunge America into recession.

 

Even if Congress avoids the crunch this year, some fear slower population and labor force growth will eventually require tax hikes to pay growing pension and social welfare costs.

 

Some In Fed Emphasize Economic Recovery on the Rise

 

San Francisco Federal Reserve Bank President John Williams set forth a more positive outlook of the economy on Friday but said lofty unemployment, a festering crisis in Europe, and the year-end expiration of simulative tax cuts make continued easy monetary policy a must.

 

"Substantial risks remain that could cause the economy to perform worse than I expect," Williams said. "Under these circumstances, it's crucial that we continue our highly accommodative monetary policy."

 

After his speech, he told reporters he's still a member of the "2014 camp," a reference to the Fed's projection that it will need to keep interest rates low through late 2014 to help the recovery.

 

Williams said the data does not change his projection that people will crowd back into the workforce as growth spurs jobs. But, he said, data over the next "many months" could force him to reconsider that view, in turn changing his views on policy.

 

While "increasingly hopeful that the recovery has entered a phase of self-sustaining growth," Williams expects only a small improvement in the labor market this year, forecasting the unemployment rate at around 8 percent by year's end and "a little below that" next year.

 

Often labeled a dove because of his strong support for employment-boosting monetary policy measures, Williams has used his vote on the Fed's policy-setting committee this year to support continued monetary easing. Still, he took issue with that label.

 

"I would think of myself as much more a centrist among the committee," Williams said.

 

If growth is faster than he predicts, or inflation rises above the Fed's 2-percent target, the Fed may need to raise rates earlier than in late 2014, he said. Interestingly, he did not defend the idea, embraced by Nobel-Prize-winning economist Paul Krugman, that boosting inflation purposefully would help the economy by prodding people into spending more, sooner.

 

The positive effects of such an effort "would be modest" and "the potential costs would be quite significant," particularly in terms of the potential for the Fed to lose its credibility as an inflation fighter, Williams said.

 

Williams on Friday projected U.S. growth at 2.5 percent this year and 2.75 percent in 2013, with inflation at around the Fed's 2-percent target this year and somewhat below that in 2013 and 2014.

 

Even those projections, at the low end of Fed officials' April forecasts, could be over optimistic, he said, given Europe's failure to definitively resolve its financial problems, and the scheduled year-end expiration of tax cuts and a payroll tax holiday in the United States.

 

In a nod to his banker audience, Williams said continued low interest rates create a "tough" environment for banks.

 

But "our mandate from Congress is to focus on the economic goals of maximum employment and price stability," he said. "Clearly, a solid economic recovery is in the best interest of the banking system as well."

 

Sharp Decline in Oil Prices

 

Oil fell sharply on Friday with West Texas Sweet crude below $100 a barrel for the first time since February, as an abrupt slow-down in hiring soured economic sentiment and technical triggers intensified selling.

 

While a downbeat jobs report weighed, traders said a combination of less definitive factors -- from confusion over margin changes to the breach of Brent's 200-day moving average -- compounded selling. Some dealers were reminded of the abrupt $10 collapse in prices on May 5 last year.

 

This week's quickening rout has effectively erased any "Iran premium" from the market, suggesting that concerns over a darkening economic outlook were taking precedence over worries about reduced exports from OPEC's second-largest producer.