Deterioration in Europe

The S&P 500 is now down over 9% from its recent high. This pullback was long overdue as news over the past few months had indicated the deterioration in Europe was picking up steam. Economic data in the U.S. has also been weakening.  As I pointed out in early April, the pattern of the last two years of the stock market rising in the first quarter on stronger economic data and seasonality only to peak and reverse course in April was a very likely scenario again this year and indeed has taken place.

Stocks are certainly more attractive now than they were a month ago, however we still do not know if the market will be able to avoid a contagion if/when Greece leaves the Euro.  If Greece were to leave the Euro, the market’s attention would likely increase its focus on Spain and Italy.

With the 10-year US Treasury rate down to 1.70%, it is obvious the market is bracing for more volatility.

On a different note, Facebook shares began trading this past Friday. With shares closing the day just pennies above their $38 IPO price, there was disappointment among investors and market pundits who had expected a strong rally in the shares after the incredible hype of Facebook’s IPO. For more on Facebook’s IPO, read on…

Facebook’s IPO

Jobs Friday

Today is what I call “Jobs Friday”, the most important monthly economic report from my perspective.  The Labor Department reported only 115,000 jobs were added in April, well short of the forecast of 165,000 jobs by economists surveyed by Dow Jones Newswires. This weak jobs number did not stop the unemployment rate from dropping to 8.1% from 8.2% in March.

Before you begin to celebrate the lowest unemployment rate since January 2009 you need to read a quote from the Wall Street Journal’s Paul Vigna:

“Hey, the unemployment rate’s down! That’s good, right? Well, it’s good if you consider more people dropping out of the labor force a good thing.  The Participation rate fell to 63.6%. Less people working means less people contributing to economic growth, no matter what the official unemployment rate says.”

Paul is referring to the fact that the primary reason the unemployment rate is dropping is another 522,000 people, who have not been able to find jobs, were considered to have left the work force in April.  Take a good look at this chart that shows the percentage of Americans who are working continued its downward decent to fresh lows in April.

Source: Zerohedge.com

Shifting gears, this is a critical weekend in Europe as France and Greece both have elections.  In France, Francois Hollande has a slight lead over Nicolas Sarkozy heading into the weekend.  Hollande has promised to raise taxes, including a 75% rate on the rich, more government spending and wants to renegotiate the European treaty that was agreed to several months ago that mandated European countries get their spending under control.

Put differently, Hollande wants to double down on the same policies that were most responsible for the Euro crisis in the first place.

Stay tuned…