Jobs Situation Throws a Wrench into Economy

“Calling the Trend” Column, by George Leong, B.Comm.

Markets have rallied in three of the last four sessions on positive breadth and bullish investor sentiment; yet, you need to be careful, as we expect increased selling pressure should the rally extend higher. The reality is that stocks are now at a crux between rallying higher to the previous highs or stalling and perhaps reversing to the downside. Earnings and continued optimism towards the economy are helping to attract buying, but given the slow growth expected over at least the next two years or more, you’ve got to wonder how high markets can rally.

At the FOMC meeting last week, the Federal Reserve suggested that unemployment will continue to be high for the next two years and called for a moderate economic recovery, which is what I expect. When the jobs market recovers will help dictate the direction of the economy. But there are numerous pundits that feel it could take five or six years or more for the employment situation to return to full employment in the United States, which is widely viewed at being between three percent and five percent.

Based on the fact that the country has lost over seven million jobs since 2008 and given the current economic situation, it will likely take many years for job creation to reach full employment. This is a sad reality of the current situation, and it will impact consumer spending and economic renewal. The first-time claims report for the week ended February 13 was disappointing, with 473,000 new claims, up 31,000 from the previous week and worse than expected. The jobs situation will remain critical going forward.

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On the inflation front, there is now some concern after the Producer Price Index (PPI) jumped a higher than expected 1.4% in January, versus the 0.8% estimate. Worst, the reading has increased for two straight months. The core PPI excluding energy and food was also higher than expected. The slight upward move in the PPI is a concern, as it will pressure the Fed to increase interest rates if it continues to rise and this would not be good for the stagnant economy.

The impact of the jobs situation and unwillingness to spend is clearly making an impact. Bellwether retail stock Wal-Mart Stores, Inc. (NYSE/WMT) reported a rise in its fourth-quarter earnings, but there is some concern after the key same-store sales figure for stores opened at least one year fell 1.6% year-over-year. In addition, the company was not overly positive going forward due to continued declines in spending. Wal-Mart is a good barometer of the retail sector and spending. Caution here indicates continued problems in the retail sector. I remain mixed on retail stocks.

I feel that much of the expectations this year have been largely discounted into the markets. For the rally to extend to the recent highs, there must be a fresh catalyst to drive the buying. Failure to break the previous highs could see a reversal in stocks back below the recent lows. The key now is to stay alert and be careful as the risk remains high.