U.S. stocks plunged again, erasing the previous day’s gains and sinking to an 11-month low as the market’s attention turned to contagion in Europe and a possible recession in the U.S.

The past few days are a perfect example of how quickly sentiment can turn in the market.  Tuesday’s rally had given some people hope that a short-term bottom had been put in place, but yesterday’s reversal suggests otherwise.

For the third straight session financials were the biggest movers, losing 7.11% as rumors swirled about bank capital levels and exposure to Europe.

Meanwhile, demand for Treasury surged as investors looked for safety.  The benchmark 10-year Treasury yield dropped to 2.07% (yields fall as bond prices rise).  The spread between two-year and 10-year Treasurys decreased to 1.9 percentage points, the least since April 2009.  A narrower spread, or flatter curve, indicates lower growth and inflation expectations among investors.

Gold prices rose to a new record high above $1800 per ounce before closing at $1784 per ounce.  Eurozone debt crisis, slowing economic growth in developed nations, and inflation concerns in emerging economies are all possible reasons behind gold’s remarkable run, and none of these issues will be resolved anytime soon.  I personally think the Fed’s low interest rate policy is the primary driver behind the bull market in gold, and we know that may be in place until mid-2013 or later.

An interesting graph about job openings and quick discussion on capitulation after the jump…

Market Activity for August 10, 2011

Sector Activity for August 10, 2011

Still All About Jobs

All this time we’ve seen what many have referred to as a “jobless recovery,” but maybe the labor market has been trying to tell us we never truly climbed out of the recession.  Policy makers have propped up financial assets to instill confidence and create a temporary boost to growth, but the jobs still aren't there.  We all know that unemployment is above 9.1% and the U-6 Rate (which includes part-time workers that want to be full-time and discouraged workers who have removed themselves from the labor force) at 16.2%, but I came across the graph below in a blog on WSJ.com that shows another disturbing view of the labor market.

Simply put, work is hard to find.  The Labor Department’s data shows that there were 4.5 unemployed people per job opening at the end of June.  Although that number has dramatically declined from 2009-2010, consider that in 2007 there were roughly two job openings for every three unemployed workers.

The dismal jobs market continues to hold back the economy.  Unfortunately business won’t hire until they see more demand, but consumers won’t demand more until they have more jobs.

Today’s economic data includes the weekly jobless claims number, which is considered a leading indicator for the labor market.  We’ve been stuck above 400k, but we need to get around 350k in order to be more optimistic about the labor situation.

Capitulation?

I’m starting to see the word “capitulation” popping up a little bit, which shouldn’t be a surprise after two big selloffs.  Is the selloff purely panic-based and has that panic peaked?  S&P 500 executive stock purchases might suggest just that.

According to Bloomberg, “sixty-six insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12-year low.”  In theory, nobody knows the fundamental value of a company better than the managers and executives running it, so many people would take this as a positive sign.

I agree that the big swings in the market of the past few days is based more on noise than fundamentals, but taking the view of capitulation requires a leap of faith that I’m not willing to take just yet.  

Peter Lazaroff, Investment Analyst

St. Louis, MO