Jobs, other data could trigger stock sell-off
Stocks may already be pricing in a recession, but they haven’t priced in a very deep one. If this week’s data on the job market and manufacturing are worse than Wall Street is anticipating, investors should not be surprised to see another tumble.
The stock market is usually pretty adept at sizing up the economy. And many market experts are saying that stocks may have already hit bottom. But considering how much mystery still surrounds the mortgage crisis -- not to mention that many analysts are starting to pare back their estimates for 2008 corporate profits -- calling the stock market’s decline over is a bit premature.
Last week began with a rally and ended with a sell-off after a batch of economic readings gave investors little to cheer about. The Dow Jones industrial average finished the week down 1.17%, the Standard & Poor’s 500 index ended up 0.14%, and the Nasdaq composite index ended down 1.07%.
This Friday, the market expects the Labor Department to report that payrolls fell by about 50,000 in March after a 63,000 drop in February, according to the median estimate of economists surveyed by Thomson Financial/IFR. Economists also predict the unemployment rate will rise to 5% from February’s 4.8%.
“If you start seeing deterioration in employment, it’s very, very hard not to have a recession,” said Jay Mueller, an economist at Strong Capital Management.
Historically, recessions have brought several back-to-back drops in payrolls, an unemployment rate persistently above 5% and initial unemployment claims that top about 400,000 a week, Mueller said.
Right now, the job market is not quite near recession-level trends, but it’s close: Unemployment briefly hit 5% late last year, jobless claims have recently been in the 350,000 to 375,000 range, and payrolls have decreased for two months in a row.
The uncertainty surrounding the U.S. employment picture in turn means that consumer spending and consumer credit trends are largely indeterminable. So even in a best-case scenario -- a strong jobs report alongside other strong data -- the stock market might see a brief pop but then remain in a holding pattern for the next few months until it is sure that the economy’s weak period is a short one.
“It seems more likely that things are going to be range-dominated until we get a bit more clarity,” said Jack Caffrey, equities strategist at JPMorgan Private Bank.
So for now, investors can expect more big swings, but little sense of direction until first-quarter earnings reports -- along with companies’ outlooks for the rest of the year -- are released next month.
This week starts with the Chicago Purchasing Managers’ manufacturing report today, which is expected to show a smaller contraction for March than it did in February.
On Tuesday, the Institute for Supply Management releases its national manufacturing report, and the market anticipates a shallow contraction for March, similar to February’s.
Then on Thursday, the institute reports on the service sector, which is expected to post a minor contraction for March, as it did the previous month.
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At a glance
Today
Treasury Secretary Henry M. Paulson Jr. to deliver speech on financial markets and proposed regulatory overhaul.
Treasury bill auction.
Tuesday
Commerce Department reports on construction spending for February.
The Institute for Supply Management releases its manufacturing index.
Major automakers report U.S. sales.
Wednesday
Commerce Department reports on factory orders for February.
Federal Reserve Chairman Ben S. Bernanke testifies about the economy on Capitol Hill.
Oral arguments for appeal by former Enron Chief Executive Jeffrey K. Skilling, who is serving more than 24 years in prison for his role in the company’s collapse.
Quarterly results expected from Best Buy, Monsanto and Research in Motion.
Thursday
Labor Department reports on weekly jobless claims.
Freddie Mac reports on mortgage rates.
The Senate Banking, Housing and Urban Affairs Committee holds hearing on the financial markets. Witnesses include Bernanke, Paulson, Securities and Exchange Commission Chairman Christopher Cox and the CEOs of Bear Stearns and JPMorgan Chase.
The Institute for Supply Management releases its non-manufacturing index.
Quarterly results due from Constellation Brands.
Friday
Labor Department reports on employment for March.
Source: Associated Press
