Though the January employment numbers were ugly, they were not surprising. The unemployment rate jumped to 7.6%, its highest level since 1992. Approximately 598,000 jobs were shed. Bloomberg News calculated that we are in the biggest employment slump since World War II.

What is surprising is the pace at which the economy is contracting.

During the first-half of 2008, the unemployment rate averaged 5.15%. Since then, things have gone downhill. It took the employment rate just 9 months to rise from 5% (April) to 7.2% (December).

GDP has deteriorated at an equally fast rate. The economy grew at a 2.8% pace in the second quarter. In the fourth quarter, the economy contracted 3.8%.

Other economic data show a similar story. For example, the ISM Manufacturing survey plunged from 49.5 in July to 35.6 last month. As a friend of my said last night, it’s not the economy that is hurting her family’s business, but rather the speed at which conditions have worsened.

Yet, the markets have a short memory. Stocks opened Friday morning with sizeable gains as traders were optimistic about progress being made on the stimulus package. Just because President Obama scolded certain members of the Senate does not mean the government will soon save the U.S. economy. If anything, the federal government has a long history of moving slower than anybody ever likes.

Then there is the new bank bailout package. The details have yet to be specified, but they will require more oversight. Wasn’t it just last year that people were worried the U.S. was losing its financial leadership to London because of too much regulation?

How quickly opinions have changed….

Unemployment will rise. A stimulus package will get passed. New regulations on banks will be instituted. All of this is probable. What is unknown is how bad things will get before the economy begins to improve.

Rest assured, a recovery will occur. We just don’t know when.

Given this, investors need to continue exercising patience, prudence and selectivity. If you are nervous about the market, consider buying smaller positions than you normally would, dollar cost averaging or use buy stops. These measures will limit your upside, but they also may help you sleep at night. From our end, we’ll continue to seek out opportunities and sell quickly when necessary.

A recovery will occur. It’s not a question of if, but just rather when.

Portfolio Updates

Multi-Fineline Electronix will be sold at close of trading today. This morning, Reza Meshgin said “recently we have begun to see softness in customer orders”. The observation represents a significant change from Jan 5 when the company stated that “current business outlook indicates that strong customer demand for its products is continuing”. MFLX will also be deleted from the Timely Buys List.

I try to avoid deleting Timely Buys stocks on any day buy Mondays, but in situations like this, an exception needs to be made.

Aaron Rents, Inc. (RNT) was removed after the stock unexpectedly plunged. We cannot offer any rational explanation for why the stock dropped so quickly. We’ll reevaluate RNT after the company releases its fourth-quarter results.

Church & Dwight Co., Inc. (CHD) was sold yesterday after the company provided disappointing guidance. The worsening economy is even starting to affect consumer staples companies.

No stocks were added this week, though one company that we’re watching reported some good numbers yesterday. We’re waiting to see the extent to which brokerage analysts adjust their earnings estimates before making a decision on it.

The Markets

I’ve been talking about the support on the Dow Jones Industrial Average ($DJI) existing at 8,000. The action of the past few weeks has shown that my estimation needs to be revised downwards. A better support line should drawn in the 7,850-7,900 range.

This may seem like a minor revision, but it is a negative revision. Furthermore, the Dow continues to set lower highs, which is bearish.

It is a similar trend for the S&P 500 (SPX), which does not seem to be able to develop any type of upward momentum.

There are several market observers establishing targets for the Dow. Even though I have warned that the Dow could hit 6,300, the reality is everybody’s crystal ball is cloudy. The data is changing rapidly and the timing of the recovery is uncertain. Therefore, when a market “expert” says they don’t know for certain what is going to happen, give them a lot of credit for admitting the uncertainty. And be weary of those who try to exude hubris and proclaim absolute forecasts.

Charles Rotblut, CFA is the Senior Market Analyst at Zacks.com. He can be reached at crotblut@zacks.com.

“RNT” Free Stock Analysis: Buy? Sell? Hold?
“CHD” Free Stock Analysis: Buy? Sell? Hold?
“MFLX” Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Last 5 posts by Charles Rotblut

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