This article is a guest contribution by John P. Hussman, Ph.D., Hussman Funds
Market internals deteriorated further last week, while valuations eased off of their recent extremes, but remain clearly elevated on our metrics. The continued combination of unfavorable valuations and unfavorable market action holds us to a fully hedged investment stance. The majority of the day-to-day fluctuation in the Strategic Growth Fund here is driven by the difference in performance between the stocks held by the Fund and the indices (S&P 500, Russell 2000, Nasdaq 100) we use to hedge. We have no inclination to buy dips here, because we have no support from either valuations nor market action.
What was most surprising about Friday's "disappointing" jobs report was that it was a surprise. As I observed a few months ago in Notes on a Difficult Employment Outlook "Presently, the 4-week moving average of initial claims for unemployment is running at 468,500. This level is normally consistent with monthly payroll job losses on the order of 80,000. Against that, however, we are likely to get significant short-term job growth from census hiring, which can be expected to exert a positive impact on non-farm payrolls through mid-year. I continue to view the 4-week average of initial claims as one of the more informative series to monitor regarding the employment situation."
A 4-week average of about 400,000 - 425,000 jobless claims is roughly where we would expect to observe flat jobs growth (excluding temporary factors like census hiring). With the recent figures running closer to 450,000, the fact that we got a positive private sector number at all was something of a gift. As the stock market sold lower on the news, it was fascinating to hear several analysts saying palliatives to the effect of, "Well, some amount of month-to-month variation should be expected. Nobody expected the economy to have a 'V' shaped recovery."
Excuse me, but that's precisely what the market has priced in. And that's the problem.
