Coming Week: Job Jitters
Nat Worden
12/29/07 - 09:32 AM EST
Stocks, headed for their fifth straight year of gains, will enter 2008 facing an uncertain jobs report that promises to dictate whether the opening bars of the new year will be a recession dirge or a gospel song of revival.
"Friday's jobs report will be critical for the market because it's a total wild card at this point. Nobody really knows what to expect," says Paul Mendelsohn, chief investment strategist with Windham Financial Services.
"If it's weak, that could confirm that the bears are right and we're entering a recession as a result of this housing mess and credit crisis," he continues. "If it's strong, that may mean our worst fears from all this aren't materializing and the stock market is dodging a bullet."
Even with modest gains in the major stock indices, 2007 will be remembered as a year of turmoil for financial markets as a sharp downturn in the U.S. housing market brought on a spike in foreclosures on risky mortgage loans, making billions of dollars of securities held by major financial institutions on Wall Street worthless or nearly so.
With their confidence shaken, investors are either looking for an end to the calamity in early 2008 or a sign that last year's mayhem was only the beginning. Before Christmas, Pimco founder and CEO Bill Gross raised eyebrows by telling the
Financial Times that the U.S. economy already hit a recession in December.
Now, the upcoming employment report from the federal government will put his controversial thesis to the test.
Economists are expecting the Labor Department to report that the U.S. economy added 70,000 new jobs to nonfarm payrolls during the final month of the year, a modest gain that would probably lag population growth, but hardly indicates a recession. They're also forecasting an uptick in the unemployment rate to 4.8% from 4.7%.
A disappointment would likely spark a selloff in the stock market, and investors will be looking for an early read on which way things will go on Thursday when the ADP employment report is released, along with a monthly job-cuts tally from outplacement firm Challenger Gray & Christmas and the weekly count of initial claims from the government.
If Friday's report is stronger than expected, investors will still have to curb their enthusiasm, because that could mean the
Federal Reserve will be less likely to ease interest rates in the months ahead. In December, the Fed disappointed Wall Street with a quarter-point cut to its fed funds rate target, while investors were clamoring for a half-point reduction.
In its statement that accompanied the announcement, the Federal Open Market Committee cited lingering inflation concerns as a factor in its decision. Investors stand to gain more insight into the FOMC's thinking when it releases the minutes from its December meeting on Wednesday.
Last week, the
Dow Jones Industrial Average fell 0.6%, and the
S&P 500 lost 0.4%. The
Nasdaq gave back 0.7%. For 2007, the Dow is up about 7%, the S&P 500 has gained 4%, and the Nasdaq is up 10%.
While the employment report promises to be a spectacle, next week will begin slowly with a full trading session on Monday -- New Year's Eve -- that's likely to be quiet as traders plan to party that night and enjoy the day off in the markets on Tuesday.
Once trading resumes Wednesday, economic news will be light, with December's Institute for Supply Management manufacturing index reading due before the opening bell. Thursday will see December sales reports from the auto industry, and the government is expected to report that factory orders rose 1% in November.
Throughout, Wall Street will be bracing for U.S. financial giants to bring out more dirty laundry as a result of the mortgage mess. Investors have already digested multibillion-dollar writedowns from the likes of
Citigroup (C),
Merrill Lynch (MER),
Bear Stearns (BSC) and
Morgan Stanley (MS). Now, they're expecting more.
Last week,
Goldman Sachs (GS) analyst William Tanona predicted Citi will be forced to write off $18.7 billion in collateralized debt obligations and cut its dividend by 40% to preserve capital. He also said
JPMorgan Chase (JPM), the third-largest U.S. bank, will write down $3.4 billion in fixed-income securities.
Mendelsohn says next week may be a good time for such announcements as corporate America's confessional period kicks into high gear as fourth-quarter earnings season begins the following week. Thomson First Call reports that expectations are being lowered, and the main drag is the financials, where analysts now foresee a 67% drop in fourth-quarter earnings. In October, they were expecting 7% growth from the financials.
Elsewhere, investors will be on guard for potentially debilitating credit downgrades for bond insurers such as
MBIA (MBI) and
Ambac (ABK), which if they occur would strike at the heart of the U.S. financial system.
Berkshire Hathaway's (BRK.A) Warren Buffett announced Friday that he's starting up a new bond insurance firm to guarantee municipal bonds. His venture will enjoy a stellar credit rating and pose a huge competitive problem for existing bond insurers, possibly further endangering their current ratings.
On top of all that, crude oil prices are approaching $100 a barrel on the New York Mercantile Exchange, the housing market's decline appears to be steepening and the assassination of the former prime minister of Pakistan, Benazir Bhutto, could aggravate geopolitical turmoil in the Mideast.
"My advice to investors is to stick with what has been working," says Mendelsohn. "I'm going into 2008 the same way I came out of 2007, with my portfolio in technology, energy and materials."
