GOLDEN VALLEY, Minn. - Already harboring anxiety over the fiscal challenges facing Europe, U.S. investors received some unwelcome news closer to home last week, a very weak May jobs report.
Dan Ament, Senior Vice President and Financial Advisor with Morgan Stanley Smith Barney in Wayzata joined us on KARE 11 Sunrise with more on how the stock market has reacted.
May Jobs Report Stinks - Stocks dropped after the Labor Department said nonfarm payrolls grew by a lackluster 69,000 last month, the smallest gain in a year. The unemployment rate ticked one-tenth of a percentage point higher to 8.2%, the first increase in nearly a year. The median estimate of economists surveyed by Dow Jones Newswires is for nonfarm payrolls to increase by 155,000, and unemployment to remain unchanged at 8.1%.
Austerity Backlash - To varying degrees, austerity is causing pain all over Europe, which, for all intents and purposes, is in a recession. Morgan Stanley economists forecast Europe's recession will end only after the region digests the worst of its belt-tightening programs. The path out of recession involves further accommodation by the European Central Bank, export growth helped by rest-of-world demand and a decline in the value of the euro to boost the region's competitiveness.
More monetary ease ahead? In the U.S., recent comments from Federal Reserve officials indicated the central bank would take more action if growth were to slow and will continue its stimulative monetary policy for a long time; the central view of the members of the Federal Open Market Committee is that the Fed will not raise rates until 2014. Near-term action could involve a third round of Quantitative Ease or selling short-dated bonds to fund the purchase of long-dated bonds in a "Twist2" successor to the current Operation Twist set to end in June. Neither measure is likely to have much of an impact on the real economy.
Why worry about the US debt load? Ever-increasing government debt presents a serious impediment to long-term growth, says Vincent Reinhart, Morgan Stanley's chief US economist. In a recent study, titled "Debt Overhang: Past and Present," Reinhart and his coauthors-Carmen Reinhart, his wife, along with Kenneth Rogoff-explored the relationship between an increased debt-to-GDP ratio and economic growth. They found that extended periods of high debt relative to GDP significantly decreased economic growth.
Equity market corrections are frequent - Contrary to popular belief, market corrections are normal and should be expected. Since 1928, the S&P 500 has averaged in a year 3.5 reversals of 5% or more, 1.1 of 10% or more and 0.3 of 20% or more. In other words, get used to it.
Sources and excerpts:
June 2012 - On the Markets - Morgan Stanley Smith Barney Global Investment Committee
Dan Ament is a Financial Advisor with The Ament Group at Morgan Stanley Smith Barney located in Wayzata, MN and may be reached at 952-475-4302 or dan.a.ament@mssb.com .
For more information and capital market research click: http://fa.smithbarney.com/amentgroup/
Morgan Stanley Smith Barney LLC. Member SIPC.
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Smith Barney or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
(Copyright 2012 by KARE. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)