Uncertainty, Stock Market Fluctuations & Jobs

Uncertainty causes most to delay decisions relating to their future.

Investors in the last few weeks faced with uncertainty following the Japanese tsunami and reactor meltdown has jumped in and out of stocks.

Dave Rosenberg at Gluskin Sheff this past week detailed the differences in risk to investors in 2011 compared to 2010.  Uncertainty, appears to be on the rise.

My colleague Ellen Beeson Zentner, Vice President & Senior U.S. Macro Economist at Bank of Tokyo – Mitsubishi (BTMU) pointed out certain correlations this week between stock market volatility and jobs.

Volatility, especially in the stock market, is a bad thing.  If it rises sharply, and persists, it has the ability to be a job killer and exhibits the same affect on business investment as well. The most recent example can be taken from the European debt crisis, which flared in April 2010. The labor market had just turned in early 2010 and job growth looked to be accelerating (see Graph II), then stock market volatility spiked and by May businesses had slowed hiring in the face of the uncertain economic outlook. Just as happened during the EU debt crisis last year, we don’t believe businesses will conduct layoffs if volatility continues. Rather, it would result in a slowdown in hiring as plans are put on the back-burner.

There is no question uncertainty is rising.  The question we should be asking is how much of this uncertainty translates to business.  Looking at Dave Rosenberg’s list of risks, many appear to be investor risks.

The global economy is not gearing up in anticipation of breakout growth.  Companies are faced with rising commodity prices – and it does not take a genius corporate executive to know rising material and component prices are major headwinds.

The predominant risk to business is rising commodity prices at a time there is little wage growth in the advanced economies.  Consumers as a group remain near their debt limits – and rising costs translates to more selective spending.

Econintersect suggests that commodity prices themselves may be the natural global economic regulator at this juncture – and not the economy killer suggested by some.  With business already lean and mean, price movements slow and speed up economies without destructive gutting seen in 2008.

Business that has survived the Great Recession is operating with excess capacity and cash, and can adjust for price inflation – all while maintaining a profitable bottom line.

And with any luck get a few major technological breakthroughs along the way.  Nothing spurs business more than exploring ways to reduce costs.

Economic News this Week:

Econintersect’s economic forecast for March 2011 points to a moderately improving economy with all segments of its non-monetary index positive.  This week the Weekly Leading Index (WLI) from ECRI declined slightly from 7.1%  to 6.5%.  This level implies the business conditions six months from now will be approximately the same or slightly improved compared to today.

Initial unemployment claims in this week’s release was essentially unchanged due to backward revision to previous weeks.  The data for the last two months as been quite noisy, and it remains important to follow the four week moving average for analysis of unemployment to smooth out the reporting idiosyncrasies.  Overall, the trend line for jobs loss is improving – and is now roughly the same as mid-2008.

The data released this week is considered positive and consistent with Econintersect’s January, February and March forecasts of slightly to moderately improving economic conditions overall.  All data – except housing – remains up year-over-year (YoY) – although less good as it is being compared to relatively strong 2010 data.  All trend lines continue to show continuing YoY growth.

Weekly Economic Release Scorecard:

Item Headline Analysis
Final 4Q2010 GDP Revised Up GDP has gone from 3.2% (advanced) to 2.8% (2nd release) – and now the final release is 3.1%
February Durable Goods Down Not necessarily down – just less good
Federal Reserve 2010 Financial Statement Compare QE1 to QE2
Global Economic Assessment Questions whether anyone can correctly assess risk in 2nd half of 2011
Future Jobs Growth CBO envisions a 2000 decade tepid jobs growth until 2021
February Truck Tonnage Down Up YoY, data just less good than January
February New Home Sales Down Worst data ever
Electric Generation Fuel Comparisons Compared Coal to Uranium as tomorrow’s fuels
Japan’s Meltdown How it effected consumer metrics
February Existing Home Sales Down Yes, down YoY against a 2010 incentive driven home sales month
February CFNAI Down Up because of backward revision
Big Banks Explores limits of large banking institutions globally
Micro-Cap Stocks Clive Corcoran finds Micro-caps are outperforming
Hated Investments Jeffrey Dow Jones explores profiting from investments most hate
Investing Week Jeff Miller maintains investors must look beyond the headlines
Stock Market Prices Erik McCurdy argues the market may be beginning a topping process
Libya Elliott Morss questions what drove international involvement in Libya.
Economic Chernobyl Rick Davis compares the elements of the Chernobyl meltdown to the USA economic situation
USA Treasuries GEAB believes the USA treasury market will collapse in 2011 for a variety of reasons
UM Consumer Sentiment Down Plummets 77.5 to 67.5

Bankruptcy this Week: Epic Energy Services and its subsidiary, Epic Integrated Services, GeoPharma

Failed Banks this Week:

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