Blame it on Jobs and Housing

— “Calling the Trend” Column, by George Leong, B. CommThere is increased tension in the air, as stocks are fighting to hold given the renewed economic concerns. Stock markets have fallen in four of the last five sessions to Tuesday and look to have been heading for another losing day on Wednesday. Setting off the selling is concern that the economic recovery will be slow and arduous rather than strong. Traders have been betting on a “V” shape economic recovery, but many economists are in fact predicting that it will be a slow ride up.

The Federal Reserve and the Treasury may be pointing to a pending recovery; yet there remain genuine concerns out there for traders and investors. Bellwether retailer Wal-Mart Stores, Inc. (NYSE/WMT) warned that the global recovery would be slow and said it would focus on its growth in China and recently into India. I expect many multinationals will do this given the condition of the U.S. economy.

The second-quarter GDP contracted less than expected, shrinking by a 0.7% annualized rate versus the estimate of 1.1%, and better than the 6.4% decline in the first quarter. The GDP is expected to return to positive in the third quarter.

A concern was the more pertinent Chicago Purchasing Managers Index, which pointed to contraction in September with a 46.1 reading, lower than the expansionary 52.0 reading estimated by economists. The index is key, but it is regional in focus; yet, it is considered a good indicator for the national Institute for Supply Management index due out on Thursday. The ISM Index is expected to show expansion at 54.0. A reading below 50.0 would be negative for markets on Thursday. Watch for this, as much of the recent buying has been driven by optimism towards economic renewal.

At the end of the day, I feel that the continued weakness in the jobs and housing markets could impact the strength of the economic recovery heading into 2010. Traders are waiting for the non-farm payroll data on Friday and looking for signs of whether the jobs market is improving. The unemployment rate is expected eventually to rise to 10%. The ADP private employment report released on Wednesday showed the loss of 254,000 jobs in September, worse than the 200,000 estimate, but better than the 277,000 jobs lost in August. For consumers to spend, we need to see improvement in jobs and housing. Both are showing signs of slowly recovering, but the pace is relatively slow, as I discussed in my previous commentary.

In addition, there is also the issue of the government’s economic stimulus spending that is nearing its end. The cash-for-clunkers program to promote spending on vehicles has been hugely successful, but it is drawing to a close. In addition, the financial assistance for first-time homebuyers has been positive; but, again, what happens when it ends? It will be interesting to see how the economy does in 2010 after the stimulus takes effect. The hope is that the government has provided the stimulus to jumpstart the U.S. economy and get it going. All we need to see is for consumers to increase their spending and drive the economy.