U.S. Economy: Expectations Just Got Halved

earnings seasonLast Friday’s U.S. jobs report was just terrible and we also got data from China showing a weakening in that country’s manufacturing sector. This put an already lackluster stock market into very negative territory, hurting investor sentiment significantly.

At the same time that we got this economic news, we also heard from the Big Three automakers and, according to them, business is booming. But, there’s a big caveat to this good news and it’s the same thing that’s been going on in the U.S. economy for years now. Even in industries where business is good, there isn’t a lot of new investment in plants, equipment or employees. Industry remains gun shy and rightly so; there is just too much uncertainty out there.

There is some recovery in the U.S. economy, but expectations are coming down. The stock market bounced back from its recent correction low, but that uptick is now wiped out. The Dow Jones Transportation Average broke 5,000 again and this is with oil prices below $84.00 a barrel! The trading action in the stock market, oil prices, and U.S. Treasuries really signifies a major revision of expectations. The outlook for the U.S. economy in 2012 just got halved. At least that is what these markets are saying.

I repeat my view that this is a decent time to be identifying and following solid, dividend paying blue-chips. I do think the stock market has further downside until second-quarter earnings season begins. I wouldn’t be surprised at all now if the stock market stays very soft until the beginning of the fourth quarter. The U.S. economy is stronger than the recent jobs report suggests, but only in certain sectors. With the eurozone toying with zero GDP growth, the U.S. economy may soon follow suit.

Stock market investors need to be very cautious in this market. While the stock market is fairly priced, this doesn’t mean that share prices won’t keep going lower. There is lots of good value in this market, but expectations are changing and this keeps share prices vulnerable. The U.S. economy does have a decent foundation to it, but the numbers suggest caution and that is exactly what the stock market is saying with its recent sell-off.

Lower oil prices are a gift to consumers and the industrial economy, but oil price market makers are saying that the U.S. economy is likely to grow at a much slower rate than previously forecast. (See Lower Oil Prices an Absolute Gift to Railroad Companies) The U.S. economy is affected by China and the eurozone and, with West Texas Intermediate below $85.00 a barrel, I’m afraid that the oil market is voting for a global recession in the near future.