MarketView for September 2

Summary  

The major equity indexes hit the skids on Friday ahead of the long Labor Day weekend as the day’s economic news did not light up the hearts of Wall Street traders. A two percent decline in the equity indexes was directly tied to a jobs report indicating that August job growth was zero. That in turn once again raised the ugly specter that another recession could possibly be in the offing. The resultant decline in share prices left Wall Street lower for the sixth week out of seven as declining issues far outweighed winners on a light-volume day ahead of the holiday weekend. Friday also marked the S&P 500's largest decline in two weeks.

Stocks had rebounded recently on expectations the Federal Reserve would introduce new stimulus to boost the sluggish economy. Although the Labor Department's latest report underscores the fact that action by the Fed in inevitable, the cannot by itself address the economy's in-depth economic difficulties.

Bank shares were again among the day's biggest losers, with Bank of America Corp tumbling 8.3 percent to $7.25, making it the top decliner on the Dow Jones industrial average, where all 30 components fell. JPMorgan Chase closed down 4.6 percent at $34.63. The government filed a lawsuit against Bank of America, JPMorgan Chase, Goldman Sachs and other large lenders over mortgage practices that led to losses at government-owned Fannie Mae and Freddie Mac.

Netflix weighed on the Nasdaq, closing down 8.6 percent at $213.11 after the collapse of its content distribution talks with pay-TV operator Starz Entertainment. Energy shares fell, the result of a 2.5 percent decline in crude futures as concerns economic weakness could curb fuel demand. For example, Chevron Corp was down 2.1 percent to close at $96.41.

As investors sought safer assets, gold prices climbed 3 percent. Newmont Mining was the S&P's top performer, ending the day up 3.2 percent to close at $64.47.

Nonfarm employment in August was virtually unchanged as falling consumer confidence discouraged already skittish businesses from hiring, thereby adding to the pressure on the Federal Reserve to provide more monetary stimulus to the economy.

U.S. President Barack Obama, in a speech set for Thursday, will unveil a jobs program he hopes will provide "meaningful" tax relief and help the nation's long-term unemployed, a top aide told Reuters Insider.

Despite the day's sharp decline, stocks were only modestly lower for the week, after a rally in the first three day of trading. For the week, the Dow fell 0.4 percent, the S&P lost 0.2 percent, and the Nasdaq was flat. The CBOE Volatility index, a gauge of investor fear, rose 5.9 percent.

Volume was light ahead of the holiday weekend, with about 6.88 billion shares traded on the major equity exchanges, a number that was well below last year's daily average of 8.47 billion shares.

Little or No Job Growth

New job growth virtually came to a halt in August, reviving recession fears and adding to the pressure on both President Barack Obama and the Federal Reserve to provide more stimuli to aid the frail economy. With the jobless rate stuck above 9.0 percent and confidence collapsing, President Barack Obama faces pressure to come up with ways to spur job creation. The health of the labor market could determine whether he wins re-election next year.

Obama will lay out a new jobs plan in a speech to the nation on Thursday, and White House advisers said the data underscored a need for action. "He will be very specific about what we can do that can have a meaningful impact on job growth in the economy right away," Gene Sperling, a top economic adviser to Obama was quoted by Reuters.

 For the first time in nearly a year the economy failed to create new jobs on a net basis according to the Labor Department's monthly nonfarm payrolls survey on Friday. Economists had expected nonfarm employment to rise 75,000 last month but they cautioned against viewing the data as a surefire sign of recession.

Employment was dampened by 45,000 striking workers at Verizon Communications. Those workers have since returned to work and will be counted as on the payroll in September. Nonetheless, the report on jobs creation remained a bleak look into our economic future. However, the unemployment rate, remained at 9.1 percent as a survey of households found both job growth and, for the first time in a year, an expanding labor force.

The data could strengthen the hand of officials at the Fed who wanted to do more to help the sputtering economy in August. The economy needs to generate about 150,000 jobs each month just to keep the unemployment rate steady over time.

The Fed meets on September 20-21, extending what was supposed to be a one day meeting to two days. Many economists now expect the Fed to launch a third round of bond buying soon to put downward pressure on long-term rates, partly because the federal government appears intent on belt-tightening. Expectations of further Fed action drove the yield on the benchmark 10-year Treasury note below 2.0 percent. The dollar rose on safe-haven flows, indicating that we are still the safe haven of choice when the world’s economic situation becomes dicey.

While employment was held back by the Verizon strike, the impact was offset somewhat by the return of 23,000 public employees in Minnesota after a partial government shutdown. If you remove both of those factors, employment would have expanded by more than 20,000 jobs last month and, without the strike, private payrolls would have increased by 62,000, instead of a paltry 17,000.

Employers created a combined 58,000 fewer jobs in June and July than previously thought and the length of the average workweek fell 0.1 hour to 34.2 hours, the fewest since January. In addition, average hourly earnings dropped three cents.

About 43 percent of the 14 million Americans unemployed in August had been out of work for at least six months. The jobless rate would have been 16.2 percent if people who want to work but have given up looking for jobs and those working only part time for economic reasons were counted.

Although hiring cooled, fairly steady readings on claims for jobless benefits, relatively strong consumer spending and continued demand for manufactured goods offer hope the economy will avoid recession.

Interestingly the consensus among economists on Wall Street is that the economy should pick up steam from here, although the recovery is so weak that a negative shock of any variety could send it sliding downhill. During the first half of the year, the economy expanded at a 0.4 percent annual rate.