What do we make of a market that ignores good news? That’s what the Dow appeared to do Friday. After starting the day on a positive note, the April jobs report showing that payrolls grew by 290,000, the market turned negative within an hour and spent most of the day in the red. For the full trading session, the broad indexes were all down. The Dow fell 1.3%, the S&P 500 was off 1.5% while Nasdaq dropped 2.3%. For the week, the markets dropped 5.7%, 6.3% and 8% respectively, making it one of the worst weeks ever.
The most troubling issue for investors, however, was not the week but Friday. To wit, why was there no bounce back after Thursday’s big scare?
One reason is that the Euro crisis in spite of all efforts remains very much a crisis, and that threatens the global economy. The second reason is that Thursday’s stock market blowout pointed up a dangerous vulnerability in the financial markets, one that we’ve known of (high frequency trading) but sort of forgotten. Third, the Labor Department’s jobs report while positive in some respects also contained a bit of negative news. For that, take a look at what economist David Rosenberg of Gluskin Sheff had to say in his Friday note to clients. Here are some snippets:
The U.S. employment report, like its Canadian counterpart, was strong on the headline but masked underlying deflationary trends beneath the surface. While the primary focus in the media and Wall Street research reports will likely be on the obvious — nonfarm payrolls surging 290,000 and an even stronger 550,000 gain in the Household survey — what caught my eye was the buildup of excess capacity in the labour market last month and further evidence of wage deflation coming to the fore.
So, what happened last month is that even with the nice headline employment gains, the labour force soared 805,000. The really critical number, which is not making the front pages, is that the ranks of the unemployed swelled 255,000 in April, the steepest increase since May of last year.
The takeaway from this analysis is that demand is not keeping pace with supply and as a result, every measure of labour market slack widened in April.
*The headline U3 unemployment rate rose to 9.9% from 9.7%, the high-water mark for the year.
*The U4 unemployment rate, which includes discouraged workers (up 203,000, the sharpest increase in 16 years) jumped to a record high of 10.6% from 10.3%.
*The broadest U6 rate backed up to 17.1% from 16.9% — to put this into perspective, before this Great Recession, this metric had never even gotten as high as 12%. It’s over 17% today. Jeez.