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Monday, June 7, 2010

Kevin Kiefer: Job Growth is Key to Recovery and Market

Friday's job numbers were very disappointing with private sector hiring declining significantly. What people need to understand is that there are enormous deflationary pressures in this economy and job growth is the only way to overcome those headwinds. Without strong job growth, this recovery and this stock market are both toast. The consumer and the private sector are continuing to deleverage and pay down debt....which is very deflationary but is a needed process in a system that had too much leverage. Even with the public debt soaring, total US debt (includes private and public debt) is declining.

We think this process will need to go on for many years with higher saving rates than what we have seen the past decade. Given this, the economy and the market can still do well if we have job growth to replace the aggregate demand lost due to the increase in savings. Also, after a few years of credit card debt going down, more income will be used to spend instead of interest payments which is a boost to the economy. As we have mentioned before, companies have cut to the bone and we believe that productivity can't go much higher in the short run so any increase in demand will lead to higher job growth than what we saw in May. We must watch the ISM and durable goods data to determine if demand is still increasing and if so, we expect much better private sector hiring in the months of June and July.

We are also still watching the 200 and 50 day moving averages on the S&P 500. We are well below both of these key moving averages with the 200 day at 1006 and the 50 day at 1154. It is very possible that the market may get a relief rally soon and we'll need to get a close above the 200 day moving average in order for us to put on more positions. If the economic data still points to demand increasing, then we should see the market get back above the key 200 day moving average quickly. Having said all of this, I am not selling or buying right now... and so I have no stock picks tonight. We'll need to keep a close eye on the economic data this month and on the charts and we'll let you know when it is safe to buy again or if it is time to sell all of our remaining positions.

I'm still a believer in this recovery... but if the market keeps hanging around below the 200 day and we can't get a close above it on the next leg higher, then I'll have to rethink that. Also, if the economic data starts coming in weaker than expected, then I'll also have to rethink that. We need good data this month to get the one thing we need to keep this economy and market going, JOBS.

Analyst Kevin Keifer can be reached at

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