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The Labor Department’s employment report on Friday pretty much took the hope out of Washington and Wall Street’s expectations that the economic slowdown in the first half of the year was just a soft spot that will quickly be replaced by strong growth in the current quarter and second half.

The economy slowed to only 1.8% growth in the 1st quarter and economic reports have been even more dismal since, to say nothing of the Fed’s QE2 stimulus program having expired at the end of June.

Yet Wall Street’s forecasts have been that the economy will recover to growth of 3.5% or more in the current quarter, with rising employment to provide a major part of the boost.

Those forecasts are probably going to have to be revised downward quite quickly.

A month ago economists were shocked when the Labor Department reported there were only 54,000 new jobs created in May versus their forecasts for 130,000. (It takes about 150,000 new jobs each month just to keep up with additional young people coming into the labor force).

However, their hopes were not dashed for long. They were sure June would be the recovery month, even though June’s economic reports were showing the economy was still slowing, consumer confidence had fallen in June to its lowest level since September and inflation had risen to more than double its level of a year ago.

But still, economists expected 125,000 new jobs would be created in June and that would be the beginning of the end of the first half slowdown -- they were wrong again!

Friday’s report was not just that only an abysmal 18,000 new jobs were created in June, but that the dismal picture the month before, of only 54,000 jobs being created in May, was actually worse, the number was revised down to only 25,000.

It was one thing a month ago for economists to say the grim jobs report for May was not important, that one month’s numbers were not indicative of a trend. But with two crushing months in a row and a downward revision of previous reports, it’s time to face the reality that the economic soft spot of the first six months is still not showing signs of even bottoming, let alone turning back up.

It will likely be awhile yet, considering that not only did the Fed’s QE2 stimulus program end last week, with no likelihood of a QE3, but Congress and the White House are in the midst of hammering out an austerity program to tackle the federal budget deficits and those measures will involve still more government worker layoffs, spending and program cuts and possibly higher taxes, further negatives for consumer confidence and the economy.

What does it mean for the stock market and investors?

In last weekend’s column I noted how the rally I had predicted was following expectations. It began as a rally off the market’s short-term oversold condition and was being enhanced by the usually positive period surrounding the end of months (which I refer to as "the monthly strength period") and the typical end-of-quarter "window-dressing" by mutual funds. But I suggested it was unlikely to have legs, that the market’s correction was likely to resume to lower lows once the rally ends.

Among my reasons, I noted that volume in the rally was very light compared to the volume on the down-days during the correction, which indicated insiders and large institutional investors who were selling during the correction, were not believers in the sustainability of the rally and were not participating, more likely waiting to begin selling again when the rally ends. And on the fundamentals, another bailout of Greece and a minor one-month bump in the ISM were hardly indications the global economic slowdown has ended, not given the continuing dismal reports on consumer spending, consumer and business confidence, the depressed housing industry and the jobs picture.

The depressing June jobs report on Friday confirms that economic growth is still slowing, not springing back to provide a big recovery in the current quarter.

So I still expect this is only a short-term rally and the stock market’s correction will resume when it ends.

In the interest of full disclosure, I and my subscribers took our previous profits from bonds and our downside positions against the stock market when the rally began, but have begun repositioning for a resumption of the correction, with initial positions in the iShares 20-year bond ETF, symbol TLT, the ProShares Short S&P 500 ETF, symbol SH and the ProShares Short Russell 2000 ETF, symbol RWM.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

Source: Jobs Report Rains on Hopes That This Is Just a 'Soft Spot' in the Economy