The market has staged a stunning 8% rally that very few people expected over the past couple of weeks. Every day it seemed like the Dow rose 150 points, and stocks like Google (GOOG) and Apple (AAPL) rose dramatically after underperforming. I think the fact that so many weren’t positioned for the move added fuel to the fire. Then the hideously bad June Employment Report hit the wires and the bulls were given a dose of reality.
June Swoon
I have to admit that my jaw dropped after Hampton Pearson of CNBC read out the numbers. Payrolls inched up by 18,000, which was well below the expectations of 100,000+.The previous two months’ numbers were revised down by a total of 44,000 jobs. The unemployment rate rose to 9.2%, and the U6, which includes discouraged workers and the underemployed rose to 0.4% to 16.2%. The report was even more disappointing considering Thursday’s ADP Report showed much stronger job gains.
As I mentioned above, the market has staged an incredible rally off its recent lows. However, I think those gains are premature given the state of the job market that seems to be worsening rather than improving. Without strong jobs growth, the consumer which accounts for 70% of GDP will not have the fuel to power this economy forward. The corporate sector is healthy, but that alone cannot do the job.
I’ve been reading several columnists state that the economy revved up in June, which was the reason for the market’s stellar gains of late. I think the putrid jobs report puts serious doubt into that argument. It will be interesting to see how much of the recent move is erased, but the argument that the economy’s soft patch is over seems to be plain wrong. Given the state of the job market, the stock market is overvalued and is pricing in too much economic optimism for the second half of the year.
No QE3
I do not believe the Fed will start of third round of quantitative easing, but any rate hikes in the near future are certainly off the table. I am willing to bet though that the market stages some sort of short rally on hopes that QE3 will occur. There are still a lot of traders that are conditioned to buy stocks on economic weakness based on this expectation. I have a feeling they will end up disappointed though.
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