Job Losses

The first half of 2008 has not passed unnoticed on Wall Street, or on Main Street for that matter, with a financial crisis still looming over the economy and, subsequently, the stock market. This week, Bloomberg reported that earnings from 291 companies of the S&P 500 Index that have reported for the second quarter have dropped 24% year-over-year. Profits in the financial sector have plummeted 87% in the first six months of 2008. Conversely, the energy sector of the S&P 500 posted a 15% gain during the same period. Weakness in financial stocks remains an anchor on the overall market.

With a severe credit crunch in full stride, a less than attractive jobs market and a heavily debt-laden consumer, the markets remain jaded about corporate earnings in coming quarters. For a technical perspective, a 200-day moving average of the S&P 500 Index clearly illustrates support under the market through the double peaks at approximately the 1550 level in July and October of 2007. As the economy grinds its way into recession (an assumption at this point), the 200-day moving average now appears to be developing a trend of resistance for the market as traders sell into strength. A relief rally from current levels up to the 200-day moving average is possible but not certain.

Over the past year or so, AIC has recommended gradually accumulating higher than normal cash balances within the accounts as the credit crisis worsened, with the idea of reentering the market at more advantageous prices. Even in a weak economy, opportunities in the stock market exist from time to time due to over-sold conditions. One of these opportunities is developing is in the financial sector. However, at this writing, there exist too many uncertainties to participate. With a weakening consumer, banks may have other asset classes, apart from housing, to write-off en masse in the months ahead, specifically, auto loans and revolving credit, i.e., credit cards. Should at least one of these proverbial “shoes” drop and financial shares spike lower or conversely barely budge, the financial sector, including insurance companies, may offer a rare buying opportunity for both income and growth investors. We’ll continue to watch the financial sector for a less risky entry point. As we have previously stated, without the financial sector, the market will have a difficult time advancing.

Perhaps, the single most important factor that will lead this country into recession (officially speaking, of course) is the loss of jobs. Today, the Bureau of Labor Statistics reported that the unemployment rate rose to 5.7% with job losses in construction, manufacturing and several service sector industries. Jobs were added in the recent period to the health care and mining industries. What is most significant and troublesome is the overall trend of job losses.