Market Talk

It was great while it lasted

So much for celebrating the Dow’s best quarter since 1998.

Stocks remain depressed – although well off session lows – as another disappointing monthly jobs report weighs on the market. The drop comes on the heels of Thursday’s 203-point sell-off that opened the fourth quarter – the largest decline since early July.

The Dow’s dropped in seven of the last nine sessions, creating cause for concern that the spring and summer rally that saw stocks jump 60% may have overextended itself.

Disappointing economic readings this week on consumer confidence and manufacturing set the stage for the monthly jobs report. BLS reported 263,000 jobs were lost in September, far worse than the 175,000 figure economists were expecting. And the unemployment rate also inched higher to 9.8%, which seems to have lots of folks chatting up a W-shaped recovery these days rather than the V-shaped one the bulls are hoping for.

Now more than ever the stage looks set for some sort of correction — which may have begun with yesterday’s vast sell-off, James Picerno writes at The Capital Spectator.

The larger issue is related to whether the nascent signs of economic recovery that we’ve been discussing these past several months have any internal momentum sans the government stimulus efforts of late. Such questions have been overlooked in the summer during the rush to jump on board the recovery bandwagon. But autumn has a way of refocusing summer flings through a more sober analytical prism.

Nevertheless, history offers a ray of hope for stocks despite the difficult start. The Dow’s 15% rise in 3Q — the best quarterly performance since 1998 — prompted Jim Bianco, CEO of Bianco Research, to check out what’s happened historically after stocks recorded similar record-setting quarters.

Bianco notes stocks generated returns of 1.3% on average during the month following quarters that saw 15%+ gains, rose 3.5% over the next quarter and 10% throughout the year, which are all better than the overall average returns for the Dow since 1900.

Still, this run-up still seems to have gotten way ahead of itself to justify higher stock prices at current levels. An economy that’s losing between 200,000 and 300,000 jobs a month does represent an improvement from the dire depths seen earlier this year. But still, it’s hard sugarcoat 263,000 monthly job losses, especially when the economy needs to gain 125,000 jobs, on average, to start growing again.

Also consider the U-6, a broader measure of unemployment that accounts for folks who’ve either stopped looking for work or can’t find full-time gigs, which jumped to 17%. Think about that for a second. Nearly one out of five folks in this country who want full-time work can’t find it.

And an economy that’s so dependent on consumer spending isn’t likely to grow anytime soon if people don’t have any money to throw around.

DJIA recently up 3 points at 9513, after falling as much as 79 points earlier in the session. S&P was off 1 at 1028.

Keep an eye on 1020, which is roughly where the index’s 50-day moving average rests, according to Bespoke Investment Group. The morning’s low was 1019.95, so holding that level would be considered a minor victory for the bulls.