MarketView for November 4

Summary

The major equity indexes all chalked up numbers in negative territory on Friday, ending four weeks of back-to-back gains as political instability resurfaced in Europe and Wall Street braced for a confidence vote in Greece after the close of regular trading.

The vote on Greek Prime Minister George Papandreou leaves the fate of a $130 billion bailout deal hanging in the balance. And once again the Street is afraid of the worst-case scenarios after markets were again engulfed by volatility less than a week after a framework solution to Greece's woes had been agreed.

The problem is that any result of the confidence vote is unlikely to end the uncertainty hanging over Greece and the euro zone. Instead, it will probably begin a protracted political and diplomatic process. Meanwhile, sectors most exposed to weakness in European banks and tied to economic growth, such as industrials and financials, were among the weakest.

As the Group of 20 industrialized nations met, Germany made little progress convincing other countries to contribute to the European rescue fund. Italy, facing its own debt problems, agreed to receive monitoring by the International Monetary Fund.

For the week, the Dow fell 2 percent while the S&P was off 2.5 percent and the Nasdaq was down 1.9 percent. Although the S&P 500 has rallied 14 percent since its October low to the upper end of its recent trading range, the market has struggled to move higher as the outlook for Europe continues to be murky.

Volume was light, with only about 7 billion shares changing hands on the three major equity exchanges, reflecting hesitation about developments in Europe.

The Group of 20 meeting got off to a rocky start. German Chancellor Angela Merkel said hardly any countries in the group are willing to participate in the euro zone bailout fund, throwing cold water on plans to stabilize Europe's sovereign debt crisis.

The crisis again overshadowed U.S. economic data. A Labor Department report showed the U.S. unemployment rate hit a six-month low in October and job gains in the prior two months were stronger than previously thought, pointing to some improvement in the still-weak labor market.

The focus on developments from Europe has kept stock trading volatile, with the S&P 500 index swinging more than 1.5 percent every day this week. The benchmark index posted its first negative week in five after closing on Monday with its best month in 20 years.

In a move to make its deficit targets credible, Italy agreed to let the IMF monitor the country's progress with long delayed reforms of pensions, labor markets and privatization. Italy's debt burden could be the market's next target after a resolution of Greece's finances.

Economic Data Shows Improvement

According to a report released by the Labor Department prior to the opening bell, hiring slowed somewhat during the month of October but the unemployment rate hit a six-month low and job gains in the prior two months were stronger than previously thought, pointing to improvement in within the labor market.

The employment report on Friday was the latest data to suggest the economy was gathering a bit of momentum and a further indication recession risks were fading. Nonfarm payrolls rose by 80,000 workers last month, the Labor Department data showed, a number that was below that of September.

Nonetheless, employers still managed to add 102,000 more jobs than previously estimated in August and September, and the jobless rate edged down to 9 percent after being stuck at 9.1 percent for three consecutive months, taking the sting out of the report.

The household survey, from which the unemployment rate is derived, showed strong job gains for a third straight month that more than offset an increase in labor force as more Americans resumed the hunt for work.

Still, the labor market remains the Achilles heel of our economic recovery and the progress so far of putting the 13.9 million unemployed Americans back to work remains painfully slow and difficult undertaking. The slight improvements hinted at by Friday's report will likely do little to take the pressure off either the President or Congress.

However, they may be enough to keep the Federal Reserve on the sidelines for a while as it considers whether the economy could benefit from a further quantitative easing of monetary policy.

The Fed on Wednesday lowered its growth forecasts, raised projections for unemployment, and said it was considering additional mortgage debt purchases. Fed Chairman Ben Bernanke said officials were eyeing Europe warily. However, weak economic and job growth will eventually compel the Fed to ease monetary policy further. According survey data, sixteen out of 19 key bond dealers expect more monetary stimulus,.

While hourly earnings rose 5 cents last month, they have risen only 1.8 percent over the past 12 months, too little to raise concerns on inflation for the Fed.

Even though the economy is in its second year of recovery, only about a quarter of the more than 8 million jobs lost during the recession have been recovered.The economy needs to expand at an annual rate of at least 2.5 percent over a sustained period and consistently add roughly 125,000 jobs a month just to keep up with new people entering the workforce.

Vice President Joe Biden said while the improvement was welcome, more still needed to be done. "There's still a gigantic hole to be filled," he said. But there are signs of progress.

A broad measure of unemployment, which includes people who want to work but have given up looking for jobs and those working only part time for economic reasons, fell last month after scaling a nine-month high in September. In addition, the average duration of unemployment retreated from a record high of 40.5 weeks hit in September.

Last month, private employers added 104,000 workers, more than offsetting a drop in government payrolls of 24,000. Public employment has fallen nearly every month this year as state and local governments grappled with budget constraints.

In the private sector, job gains were almost across the board, though construction fell 10,000 after a surprise addition of 27,000 jobs in September.

Manufacturing payrolls rose 5,000 after a slight decline in September. Factory hours also increased, a positive sign for a sector that has supported the recovery. In the service sector, retail employment added to the prior month's gains.

There were also gains in professional and business services, and temporary employment, which rose 15,000. Economists often look to temporary hiring as a harbinger of increased permanent employment. Hiring in the healthcare and social assistance sector, which has been boosted by the swelling ranks of retirees, rose 16,300. However, the gain was less than the prior months.