A fresh batch of bad U.S. economic news, combined with the continuing European debt crisis, dealt the stock market a one-two punch last week that doesn't bode well for equities in the near term, according to analysts.
Friday's dismal employment report — just 69,000 jobs were created last month, well below the 150,000 expected by economists — nudged the nation's jobless rate up a 10th of a percent to 8.2%. It was the worst monthly jobs report in a year.
The weak employment numbers came just one day after the Commerce Department revised its outlook for U.S. economic growth to 1.9% this year, down from its previous estimate of 2.2%.
“This data shows everybody that the economy is slowing,” said Doug Roberts, chief investment strategist at the Channel Capital Research Institute LLC, a macroeconomic-research firm. “Reality is setting in.”
Meanwhile, while debate continues over whether Greece can, or will, abandon the euro currency, Spain's debt troubles resurfaced. Spanish bond yields soared last week, increasing the government's borrowing costs in the wake of a $23.8 billion government bailout of the country's third-largest bank.
It all added up to a decline in the U.S. stock market.
The Standard & Poor's 500 finished the week at 1,278.04, down 3%. It was down 6.3% last month and is up 1.6% for the year.
The latest jobs numbers are particularly disturbing to analysts.
“Right now, I'm hiding under my desk,” Evermore Global Advisors LLC chief executive and chief investment officer David Marcus joked Friday morning.
“It's just one month, but it is a significantly negative number,” he said. “The jobs report shows that the financial crisis is not just a problem in Europe.”
John Carey, who oversees $11 billion of the $220 billion under management at Pioneer Investments, is taking some comfort in the fact that that the United States is in better shape than most other economies.
“Although our own growth rate is moderate, I think it's sustainable, and we still have the potential of the housing market, which hasn't kicked in at all yet,” he said. “We're stuck in this subpar 2% growth rate, and people keep hoping for something stronger, but we just haven't seen it.”
Meanwhile, Europe “continues to drive everyone crazy from one day to the next,” Mr. Carey said. “There are underlying concerns that the European economy is slowing down, and the deeper concern for investors has to do with the overall economic affect.”
On Europe, which represents 20% of U.S. exports, the handicapping continues, and the outlook for Greece in particular doesn't look good.
“Our view is that Greece is in very bad shape, and they need their debt to be forgiven if they're going to stay in the euro,” said Cindy Sweeting, director of portfolio management of the global equity group at Franklin Templeton Investments.
“We're at the point where Greece has come down to a [June 17] popular vote after the first election when the populace voted against austerity,” she said. “It's not surprising that you're starting to see a populist backlash against austerity because austerity without growth is difficult to accept.”
WAKE-UP CALL
Ms. Sweeting acknowledges that Greece and Spain both face financial peril but distinguishes Greece's troubles from those of Spain by pointing out: “Greece cooked their books and borrowed too much, while Spain had a super real estate bubble that they haven't even begun to address.”
Thus, while Spain is making news again, it is Greece that ultimately could represent the wake-up call for the rest of Europe and possibly even the United States.
“Let's say Greece votes and goes out of the euro. They will go into a major depression, and hopefully, the rest of Europe sees that and works hard to buy some time and recapitalize their banks,” Ms. Sweeting said.
However, “right now, there's a big game of chicken going on between Germany and the other creditor nations, and all the debtor nations,” she said.
Although the situations in countries such as Ireland and Spain aren't yet as dire as in Greece, Ms. Sweeting warned that they could be next in line.
And she said the United States isn't far behind some of the debt-laden European countries, she said.
But unlike a eurozone country, the United States still has the ability to inflate its way out of debt.
“When you've got a huge debt overhang, you're choices are austerity, growing out of it, have your debt forgiven or default, or you just inflate your way out of it, which individual members of the euro can't do,” Ms. Sweeting said. “This whole thing should be such a wake-up call for the U.S., because there will come a time when the bond market will not want to continue funding the U.S. government at 2.5%.”
jbenjamin@investmentnews.com
