Dismal Jobs Growth Shocks Stocks

For the third consecutive month, the employment report was a disappointing one, with a measly 80,000 jobs created during June. The unemployment rate continues to perch above 8%, as it has for the last 41 months. The report seemed to confirm the worst-case scenario that domestic growth, already slow, is starting to stall even further.

There are some positive indicators that the job market isn’t a total train wreck, as average work hours have increased and hourly wages have improved slightly. However, it is still clear that jobs are difficult to come by for most of the unemployed.  In fact, the rate of people applying for unemployment benefits is higher than the job creation rate.

As bad as the job economy seems to be, is it bad enough for the Fed to issue QE3? Probably not. The Fed, like the ECB, has very little left in its arsenal to boost growth.  I don’t think that a recession is in the cards, but GDP growth will likely be below 2% this year.

All of this economic gloom is already baked in the cake. The driver of stock returns in the short-term is the so-called “fiscal cliff,” (i.e., the proposed termination of the Bush tax cuts in January), and the fate of the EU.  I think both of these problems have long-term solutions, but getting there will likely be a volatile ride for investors.

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