Thursday morning markets

by Rossputin | 8:01 am, October 2, 2008 | Comments Off

Thirty-five minutes after the stock market opening on Thursday, the morning after the Senate passed its version of the bailout bill by a wide margin, the Dow Jones Industrial Average is down about 230 points, in part because of a government report that jobless claims remained at a 7-year high. The S&P 500 is down 28 points, more than the Dow in percentage terms.

The last rapid 50 points down (in the Dow) came after a report this morning that August factory orders dropped by 4%, substantially worse than the 3% drop forecast by economists.

It’s hard to tell whether market participants are suggesting that the bailout bill will not only fail to prevent a recession but could actually make things worth in the long run. (It’s hard to tell because I believe the market would be going down at this time regardless of the credit crisis, though the downturn is clearly worse…probably much worse…than it otherwise would be.)

Tomorrow brings an important employment report. From an AP article on the subject:

(Economists) predict the report will show that the nation’s employers cut 100,000 jobs last month. That’s on top of 605,000 jobs that were eliminated in the first eight months of this year.

The report is expected to show that the jobless rate remains at 6.1 percent. The rate jumped above 6 percent for the first time in five years in August.

The financial crisis will likely cause greater job cuts in the coming months. Several large, troubled banks have been bought by competitors and layoffs are likely.

Citigroup Inc. on Monday purchased Wachovia Corp., which had about 120,000 employees. JPMorgan Chase & Co. last week bought Seattle-based Washington Mutual, which employed roughly 43,000.

Several companies have announced layoffs in the past week, including aluminum company Alcoa Inc., auto retailer CarMax, Inc. and chicken producer Pilgrim’s Pride Corp.

My guess is that economic statistics will continue to generally be worse than economists’ guesses for a few months and that we will see at least one quarter of negative economic GDP growth, i.e. a shrinking economy, in the next few quarters. The credit crisis may have not gotten serious early enough in the third quarter for Q3 GDP to be a negative number. But I’d bet Q4 will be.

For that reason, and because I believe hangover from the credit crisis will cause the downturn to be somewhat deeper and longer than others might expect, I believe the market has somewhat more to go on the downside, maybe 10%-15% more, and that it will not recover quickly.

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