Monday, September 10, 2012

A Preview to the Fed's Announcement

President Obama's recent speech at the Democratic National Conference seemed to focus a bit too much on the tough road ahead. Perhaps astute traders took that to mean that the next day's jobs report would be disappointing. It sure was. Nonfarm payrolls increased by an incredibly anemic 96,000. What's worse, the gains for June and July were revised down from 64,000 and 163,000 to 45,000 and 141,000, respectively.

Furthermore, the one piece of good news turned out to be an anomaly. The unemployment rate fell from 8.3% to 8.1%, but only because more people dropped out of the labor force. I have been beating the drum for some time about the deteriorating employment participation rate. It just keeps on falling. It is now down to 63.5%, the lowest it has been since September 1981!

So why didn't the stock market sell off on the news? Because, in their twisted logic, investors seem to believe that the worse the jobs numbers get, the greater the odds for more monetary stimulus from the Federal Reserve. In fact, if the jobs numbers had been strong, stocks probably would have sold off.

The Fed's Open Market Committee will meet this Wednesday and Thursday. The Fed will then provide its economic projections and Chairman Bernanke will hold a press conference. Investors will be listening carefully and hoping for more stimulus. Chances are good that something (perhaps QE3) is on the way. It remains doubtful, however, if it will do much good. After all, high interest rates are not what ails this economy. The Fed's announcement might boost stocks, but only temporarily. With Europe facing recession, growth slowing in China, and the U.S. economy stuck at less than 2% growth, the returns from more monetary stimulus could be meager at best.