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 exercisinge 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.
