Jobs dip heightens fears of recession
Blame a drop of 4,000 jobs last month, the first decline in payrolls in four years, for fanning fears that an economic recession is on the horizon - and all but cementing a cut in the target for short-term rates when the Fed meets Sept. 18.
The job weakness suggests the fallout from the housing-market bust and mortgage defaults and resulting credit crunch is spreading beyond the hard-hit housing and financial sectors. As a result, investors believe borrowing costs must be lowered quickly and aggressively to offset the increasing vulnerability of the broader U.S. economy.
"The data provides additional confirmation that the Fed needs to cut rates," said Michael Strauss, an investment strategist at Commonfund. Strauss says several easings may be necessary to help jumpstart financial markets and economic growth.
Market jitters were apparent Friday. The Dow Jones industrials fell 250 points, or 1.9 percent, to 13,113.38. The Dow is up just 5.2 percent this year after falling almost 900 points from its July 19 high of 14,000.41. Investors also flocked to what is considered a haven: U.S. government bonds. The yield on the 10-year Treasury note, which moves in the opposite direction of price, sank to 4.37 percent from 4.50 percent a day earlier, its lowest yield since January 2006.
While a rate cut would give investors a psychological boost and ease some of the pressure on financial companies and indebted consumers, it's not expected to solve all the problems facing the economy and markets overnight, says Liz Ann Sonders, chief investment strategist at Charles Schwab.
"I'm not sure a (quarter-point or half-point) cut will be a quick elixir," she says. "But it will help mitigate the broader impact of the problems we're facing."
While rate cuts have historically given stocks a boost, their impact on the economy doesn't kick in for roughly six months, notes Alan Skrainka, investment strategist at Edward Jones. Nor will cuts bail out homeowners over their heads in debt or make skittish lenders more willing to lend.
With the odds of recession rising, James Stack of InvesTech Research is playing defense. He says he has 55 percent of his portfolio in cash.
WBJ Web Partners
Most Recent
Most Recent
0 Comments