Investors saw the sorry state of U.S. job growth in July and rushed for the lifeboats, as North America's major stock indexes sprang leaks for the second successive day. The Dow Jones industrial average tumbled 147.7 points to 9,815.33, its lowest close in more than eight months. In Toronto, the S&P/TSX composite index slumped 91.20 points to 8,176.68.
Can you blame them? The market's worst fears were exceeded by the U.S. jobs report. The U.S. economy generated a pathetic 32,000 jobs in July — nowhere near the expected 240,000. Still worse, the U.S. Labour Department also trimmed its previous estimates for May and June job growth by a combined 61,000 positions, meaning the July figure was actually down 29,000 from the previously reported June level.
Canada's own July job figures were also lower than expected — a mere 8,700 new jobs, compared with expectations of 28,000 — but there was enough strength in the underlying details to calm concerns about the headline number.
Investors on both sides of the border were focused on the suddenly shaky state of U.S. job creation, which had market watchers whispering a phrase the U.S. economy thought it had silenced earlier in the year: "jobless recovery."
Job creation was supposed to propel the world's biggest economy to the next level, providing the final key cog in the global economic recovery, putting fresh cash in the hands of the voracious U.S. consumer and picking up where consumer-friendly interest rates and tax cuts had left off.
It was supposed to be the fuel that would help sustain growth in corporate earnings. Now, those expectations have been brought into question, and along with them, investors' valuation assumptions for stocks.
A lack of job growth should not, in itself, be a death knell for stocks. During the jobless recovery of 1991-92, the Dow rose 11 per cent in a four-quarter period in which U.S. employment was flat. The Dow also increased 25 per cent during 2003, when the U.S. economy shed almost 600,000 jobs.
But the latest slowdown in job growth comes at a time when there is an accumulation of risk factors that stretch out on the investing horizon. What's problematic for the markets is the unfortunate timing of the puzzling employment slowdown, as much as the numbers themselves.
Something the market had believed was more or less settled — the question of steady interest rate increases by the U.S. Federal Reserve Board over the rest of the year — is now less certain, as the lack of job growth makes the Fed's 2004 economic growth forecast of 4.5 to 4.75 per cent look a bit rose-tinted.
Analysts still figure the Fed will stick to the plan and raise rates 25 basis points at its meeting next Tuesday, but it's now up in the air what the Fed will do at its meetings in September and November. (A basis point is 1/100th of a percentage point.)
Meanwhile, the spectre of high energy prices is unlikely to dissipate over the next month regardless of what happens with OPEC and Yukos, because August is a time of seasonally high demand.
The U.S. presidential race, which should become even more heated as a result of the Bush administration's failure to generate consistent job growth, will kick into high gear in early September after the Republican national convention. The tight race could keep the market on edge through to the vote.
In the midst of this will be third-quarter earnings season in October. Investors had anticipated a tail-off in profit growth, but the weak jobs picture and the impact of energy costs raises questions about how severe the drop will be.
All of this provides plenty of incentive for investors to sit on the sidelines until after the election, prolonging a rut the markets have been stuck in for the past five months.
With stocks down for the year to date — the Dow is off 6.1 per cent so far in 2004, while the TSX is down 0.5 per cent — a sideways drift well into the fourth quarter won't leave the markets with much chance to turn things around before the year ends.
David Parkinson is the investment editor of Report on Business.
© The Globe and Mail
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