[dropcap]S[/dropcap]tocks were up modestly for the week as US job creation overpowered waning confidence in the ECB’s ability to stabilize the European debt crisis. Global indexes fell each day through Thursday as ECB President Mario Dhraghi’s prior week comments about preserving the Euro were not followed by convincing action. Markets then rebounded sharply on a jobs report released Friday which showed US payrolls increased more than expected. The result suggested the US is less likely to follow Europe on the path toward recession. Treasuries and gold lost value, while the price of oil increased.
S&P 500: 1,391 (+0.4%)
MSCI EAFE: (+1.2%)
US 10 Year Treasury Yield: 1.56% (+0.02%)
Gold: $1,601 (-1.4%)
USD/EUR: $1.239 (+0.5%)
- Monday – US Treasury Secretary Timothy Geithner met with German Finance Minister Wolfgang Schaueble. They issued a joint statement backing ECB President Mario Draghi’s comments that the Euro will be supported, but did not announce any new policy.
- Tuesday – Michael Phelps became the most decorated Olympic athlete in history, winning his 19th medal.
- Tuesday – UBS announced it lost $350 million on the Facebook IPO, and said it would begin legal proceedings against Nasdaq.
- Wednesday – The Fed concluded a two day meeting and issued a statement which implied it is more likely to take additional action to stimulate the economy.
- Thursday – The House of Representatives voted to extend tax breaks for all income levels. The bill won’t advance to the Senate and sets the stage for a showdown toward the end of the year.
- Thursday – ECB President Draghi dashed hopes that the bank would take immediate action in beginning bond purchases by saying the ECB would only begin to deploy the full force of its arsenal after governments began using existing rescue funds.
- Thursday – Knight Capital Group announced it would look for strategic partnerships or a buyer after losing $440 million in software related trading errors.
- Friday – The US Labor Department announced payrolls increased by 163,000 in July, better than expected. Stocks rallied.
Friday’s jobs report was encouraging, but the official unemployment rate actually ticked up to 8.3%. This is the longest stretch above 8% since the Great Depression. The economic collapse in the 1930s is often blamed on tight fiscal policy and foolish trade restrictions. It took the onset of World War II for employment to improve. In every recession since, the economy naturally rebounded and moved toward full employment relatively quickly. This begs the question, is something different this time? Monetary and fiscal policy are accommodative, so those can’t be the culprits.
Some people blame globalization, but the US economy has been internationally connected since this country was founded. In the early days of the country, cities such as Boston and Charleston were almost entirely reliant on international trade. The internet makes it easier to offshore some service jobs, but we don’t view today’s globalization much differently than globalization of the last 60 years.
Job destroying technology is also nothing new. Between 1957 and 1964, factory output doubled due to advances in automation, and blue collar manufacturing jobs declined. Yet unemployment remained low. But maybe the rate of job destroying technology in the Internet Age is increasing faster than the economy can react. For example, Expedia pretty much wiped out travel agents. Netflix killed thousands of Blockbuster jobs. Even Personal Capital is attempting to make financial services more efficient by removing the need for traditional brick and mortar bank branches. Less tellers and less commission based investment advisors, but a better service delivered to the client for lower cost. Put simply, Shumpeterian job destruction is accelerating.
This could also explain the widening income gap. Jobs that can’t be automated away are being paid more, while those that can are being paid less. The competition isn’t as much someone in China as it is a machine or the internet. Ultimately, new industries will spring up to create new jobs, but there can be a long lag effect. Lest we start to sound socialist, we would like to point out that the very long term result should be higher living standards and more leisure time for everyone. This has been the general pattern since the beginning of time and we see no reason for it to stop now.
Hopefully unemployment drops rapidly, following the pattern of all recessions of the past 60 years. If it does not, it could create significant social problems, but stocks may decide to move forward anyway. America remains the most resilient economy in the world. Especially with current monetary policy, a return to high growth may be possible even if unemployment remains stubbornly high.