Market Roundup
Dow +235.57 to 16,284.70
S&P +35.94 to 1,920.03
NASDAQ +102.84 to 4,620.17
10-YR Yield +0.01 to 2.06%
Gold -$11.30 to $1,115.80
Oil +$0.34 to $46.17
The ADP Research Institute just said the U.S. economy added 200,000 jobs in September. That was a small rise from 186,000 in August and slightly above economists’ forecasts.

Don’t get used to it, though. Because my bold prediction is that this will be the last strong jobs number for a LONG time!

Look, the Federal Reserve continues to believe we can remain a relative island of prosperity in a tumultuous world. So do a lot of mainstream economists and reporters.

Indeed, as soon as the ADP number hit the tape, the CNBC pundits were chattering about how this “proves” the U.S. economy won’t get dragged down. Not by the implosion in overseas markets … the ongoing meltdown in energy … the weakness in manufacturing … or any of the other challenges out there.

But if you look behind the ADP headline, you see that factory employment shrank by 15,000. That was the worst drop in almost five years. Things aren’t going to get much better, either, with U.S. exports poised to decline in 2015. That’s the first time that has happened since the Great Recession.

Are we on the verge of more layoffs and weaker employment reports?

Companies in the energy patch are continuing to fire workers, as evidenced by yesterday’s Chesapeake Energy (CHK) announcement that it would eliminate 15% of its workforce. So are diversified manufacturers like Caterpillar (CAT), which recently announced it would lop up to 10,000 workers off its payroll.

I find it patently ridiculous to assume that rising layoffs, falling exports and reduced hiring won’t impact domestic demand for housing, cars, retail goods and the like. And I believe investors in assets like junk bonds are sniffing out a broader economic slowdown.

Yields are surging to multi-year highs, and prices are falling to multi-year lows there. It’s no longer happening mostly in energy bonds, either. The pain is spreading to a wider and wider swath of bonds in other industries and sectors.

Bottom line: A major ECONOMIC turn may be at hand, rather than just a major MARKET turn. If I’m right, the figures we got out of ADP today … and that we’ll get out of the Labor Department on Friday … are going to be the best you’ll see for some time.

That’s another factor that should weigh on stock prices going forward. So be sure you continue to stay cautious and defensive when it comes to investing strategy.

“Investors in assets like junk bonds are sniffing out a broader economic slowdown.”

Now I’m interested in hearing what you think. Is the overall job market going to deteriorate from here?

Or will strength in services and domestically-focused business offset weakness elsewhere? Should you place more “recession-style” bets? Or do you think investing for stronger U.S. growth is a better play? Head over to the Money and Markets website and share your answers with me and your fellow investors.

Our Readers Speak

Global stocks caught a bit of a reprieve yesterday and overnight. But that didn’t seem to convince many of you we’re in for better conditions ahead.

Reader Calabro said: “I believe we are in a deflationary cycle. It has been proven over and over again that during the boom period, especially when interest rates are at low levels, investors tend to borrow and over-invest, especially in the capital goods part of our economy.

“When the yield curve flattens, people begin to start paying down debt by selling other assets. Depending on the amount borrowed, these other assets are sold at fire sale prices. This process spreads like a contagion, which as you well know, is known as bad deflation. The Fed will try to fight this by printing more money. It will not work. The market must be allowed to clear itself of its mistakes.”

Reader Books said: “With safe savings earning nothing for years, many retirees are using up their savings. Now with market gyrations and advice to be in cash, our money is not growing to keep up with the cost of living.

“Despite talk of deflation – groceries, prescriptions, utilities, car costs, etc. continue to rise. Many retirees have been helping their adult kids and grandkids due to job losses, low wages, etc. This does not bode well.”

Reader Tom3451 added: “With velocity of money at an all-time low, and the labor participation rate at a 38-year low, watch out below.”

Finally, Reader Fred 151 said: “This Glencore thing could really spread. Reportedly they are having serious credit problems, sorta like Lehman. With no credit, companies die. Many companies in the Great Depression were in good shape. They just could not make regular payroll because there was NO credit for even such small costs.”

I appreciate the feedback. You’re absolutely right that credit is essential to the functioning of any economy, and that’s why the large deterioration in the junk bond market is so important. That weakening is now beginning to spread to higher-rated corporate debt, albeit with less intensity.

None of this is bullish for equities, nor is the resurgence of deflationary pressures in Europe, Japan and elsewhere. So I agree with you – this is a time to buckle up and invest for safety rather than aggressive growth!

Keep those comments coming at the website when you get a chance. Here’s the link to get you started.

Other Developments of the Day

● The obvious failure of QE to work anywhere in the world was once again laid bare for everyone to see, with Europe reporting today that consumer inflation dropped 0.1% in September. That was the first negative print in six months, and it comes despite a massive $1.2 trillion QE program from the European Central Bank. Japan also just slipped back into deflation, with prices falling 0.1% in August despite a ridiculously large amount of QE from the Bank of Japan.

● One problem going forward could be an economic slowdown on the Continent. Germany reported a 2,000-worker rise in unemployment in September, compared to expectations for a decline of 5,000. The unemployment rate held at 6.4% in Germany, better than the Eurozone-wide unemployment rate of 10.9% in August.

● Turmoil in the Middle East and South Asia is picking up again. American fighter planes launched another round of airstrikes on Taliban forces in an effort to help Afghan troops keep them from overrunning more territory in the northern city of Kunduz.

Meanwhile, Russia’s Parliament approved the use of force in Syria in support of leader Bashar al-Assad. That could lead to Russian airstrikes in the country even as the U.S. and other allied nations are bombing ISIS targets in the region.

● Hurricane Joaquin is strengthening and potentially headed for a strike on the U.S. East Coast. The hurricane is moving toward the Bahamas, but is expected to turn toward the north in a day or two and head toward the eastern Seaboard somewhere from North Carolina northward.

Is Europe’s economy in trouble, and what does that say about the success or failure of Euro-QE? What do you think about the ongoing turmoil in the Middle East, and the possibility of Russian and U.S. warplanes conducting bombing runs practically side-by-side? Let me know over at the website.

Until next time,

Mike Larson