In The Rear View Mirror:

With the June jobs report in the books, two things are now abundantly clear. First, the U.S. economy is fragile at best. Second, global financial markets have little tolerance for weak employment data from the world’s major economies. The Labor Department told us that the U.S. economy added 80,000 new jobs in June. Economists expected 100,000 and making matters worse is the fact that the jobless rate is stubbornly stuck at 8.2%.

Ultimately…it’s always about politics AND politics are ultimately about the economy

For three months that comprised the second quarter – April, May and June – the U.S. economy added an average of just 75,000 new jobs per month. That’s a third of the tally added each month in the first quarter. This usually isn’t the place to come for political commentary, but since this is an election year, it should be noted that every month of week jobs data bodes ill for politicians from BOTH parties that are looking to keep their jobs come November.

Of course, the big problem with weak economic data here in the U.S. is that it makes investors overly skittish. Perhaps with good reason. The recent spate of weak economic data tells investors that U.S. equities are not necessarily a safe haven, they are merely less bad… relative to their embattled European counterparts.

Market Report

Hey…we were hanging in there until Friday’s jobs report

And then, the week’s gains were gone. Led by the Dow which fell 124.20 points on Friday (-0.96%) to close at 12,772.47 and NASDAQ which lost 1.30% or 38.79 points, U.S. stocks took a dive on the news. Obviously, investors can see the economy is weak, that employers are not adding enough jobs to sustain recovery and now they are asking…”Where do we go from here?”

Well…they headed to safer assets…the US Dollar rose $0.0241 against the Euro (closing at 0.8139 Euros); the price of treasuries rose…pushing yields down….the 10-year bond closed at $101.813 (up $0.875) while the 30-year bond was up $1.938 to close at $106.938.

The struggling economy also had its effect on commodities…WTI Crude Oil lost $0.51 for the week…closing at $84.45 a barrel. Look for pull backs in some of the energy names.

If you read this column often you know that we talk about the “gold sea saw;” well, it just moved back below the $1600 support level…down $25.10 for the week to close at $1,578.40.

On a more positive note, our small cap bench mark Russell 2000 gained 8.65 points (1.08%) this past week to close at 807.14…up 8.94% YTD. And our emerging markets index was up 1.13%…which moved the YTD gain up to 4.17%.

The jobs report wasn’t the only sour news

Aside from the jobs report, there were several other cautionary tales on the data front last week. The Institute for Supply Management said its non-manufacturing index dropped to 52.1 in June from 53.7 in May. Economists expected a June reading of 53.

In economic news, the Commerce Department said factory orders rose 0.7% in May, easily topping the 0.2% increase economists expected. The April reading was revised lower to show a 0.7% decrease.

Additionally, the Institute for Supply Management said its manufacturing index fell to 49.7 in June from a May reading of 53.5. Readings below 50 indicate contraction. Economists expected a June reading of 52.2. The Commerce Department said construction spending increase 0.9% in May to a seasonally adjusted annual rate of $830 billion.

Basically all those data points were a cornucopia of good, bad and neutral news. If they combined for a draw, the draw was broken by the jobs report. The good news/bad news is attention will shift from economic to earnings news in the coming weeks. Let’s address that with these factoids…

The Bottom Line for Stocks

A decent chunk of the S&P 500 constituents, 85 to be precise, have already warned on earnings. The quarter’s expected earnings growth of 5.8 percent is entirely due to Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC), according to Reuters. Nearly a quarter of the companies warning on their second-quarter results have blamed Europe. No surprise there.

The real silver lining in all of this is twofold.

First, it’s clear large-caps are struggling.

Second, most micro-caps are not struggling. In fact, the iShares Russell Micro-Cap Index ETF (NYSE: IWC) has jumped 8.1% since the end of May.

Two sectors that we have been bullish on several months now account for almost a third of that ETF’s weight – health care and technology. We reiterate that view today on the basis that when it comes to micro-caps, those sectors are not exposed to Europe and are home to rising earnings and opportunities.

Research and Editorial Staff
MicroCap MarkePlace
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