Worsening Jobs Data Bode Ill for Stocks

With the dog days of summer behind them, our pundits returned to their desks this week ready to take a fresh look at the markets and the economy. They didn't like what they saw.

J.P. Morgan strategist Thomas Lee warned that stocks could sag to lower levels than July 15, when the Dow Jones Industrial Average closed below 11,000, if the jobs picture worsened.

"If the lows don't hold, what is the play?" he asked on Thursday. "If the July 15 lows are broken, there is not much safety, except perhaps in staples, utilities and health care."

Lee's fears were quickly realized on Friday morning, when the unemployment rate jumped to 6.1%, near a five-year high. The Dow fell to around 11,100 in early trading, a stone's throw from the July 15 low.

Though small consolation, Jeffrey Kleintop at LPL Financial pointed out that at least the U.S. is holding up better lately than much of the rest of the world.

"Dollar weakness kept the U.S. market, tracked by the S&P 500, and the international markets, tracked by the MSCI EAFE index, tracking each other very closely until about a month ago," he wrote on Tuesday. "In mid-July, the foreign markets began to sharply underperform as the U.S markets rebounded. The combined pressures of a rising dollar and weakening European and Asian developed market economic data resulted in U.S. outperformance."

According to Merrill Lynch's Michael Hartnett, emerging markets will continue to slide, as commodity prices fall and local interest rates rise. But he also said this is a cyclical phenomenon.

"Growth and rate expectations need to reverse for a sustained bid to re-emerge," the emerging markets strategist wrote on Tuesday. "But EM valuations are already cheap. And we remain big secular bulls: the growth, liquidity and credit advantage is with emerging markets in coming years."

While Yardeni Associates founder Ed Yardeni saw healthy signs in recent comments by General Electric (GE) Chief Executive Jeffrey Immelt about a rising backlog in power generation equipment orders and broader capital equipment export data, he said that wasn't the whole picture of a troubled economy.

"Of course, housing-related and auto-related industries remain very depressed," he wrote Sept. 4.

And bond guru Bill Gross, writing his September investment outlook for Pimco, said that is still at the heart of our woes, and which could even expand them once the huge amount of leverage applied to those declining asset values is calculated.

"It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse," he wrote. "In the housing market for instance, it is one thing to observe a 15% national decline in home prices. It is much more serious however, when margin calls in the form of monthly mortgage payments (many of which are in-creasing due to adjustable or option-related contractual provisions) lead to foreclosures, which in turn cause a debt liquidation."

Gross and other pundits say that containment rests in the hands of U.S. and foreign policy makers, now back from the holidays and ready to respond to the next crisis.