Market Prices Worst-Case Scenario

The extreme volatility and sharp market downturn reflects a worst-case scenario for the U.S. economy. Granted, the recent run of economic reports has been on the weak side and the odds of another recession have increased, but there is more positive momentum in the data than the sell-off is making us believe. Developments in Europe and new question marks over French banks are not helping sentiment either, but the epicenter of the downturn is here in the U.S. and is led by the weak economic outlook.

On the domestic economic front, we got better-than-expected Jobless Claims numbers this morning. Weekly Jobless Claims dropped 7,000 for the week to 395,000. The relatively more stable four-week average dropped by 3,200 last week to 405,000. The drop in the claims level to under 400,000 is a net positive, though I would caution that these weekly numbers are prone to revisions in the subsequent weeks.

But notwithstanding the level of claims in this week, the overall trend over the last few weeks is clearly in the positive direction. Let's not forget that jobless claims were as high as 478,000 in April. The claims level has remained at or above the key 400,000-level for more than four months, but the trend in recent weeks has been to the downside. If this trend is sustained in the coming weeks, it will be a major improvement in the macro picture.

On the earnings front, we had Cisco (CSCO - Analyst Report) come ahead of top- and bottom-line expectations after the market closed on Wednesday. The networking giant appears to be making steady progress in bringing its cost base under control. We had Sara Lee (SLE - Analyst Report) come out with better-than-expected results this morning, but they guided lower. In market trivia, Apple (AAPL - Analyst Report) appears to have finally edged past Exxon (XOM - Analyst Report) to become the company with the largest market capitalization.

Sheraz Mian is the Director of Research at Zacks Investment Research where he relies on valuable data to assess winning stocks and funds.

The information supplied above by Zacks Investment Research Inc. contains opinions based on factual research which may or may not be accurate. Neither Zacks or Intellisphere will assume any liability for losses from investment decisions based on this information.

This would be in line with the positive development we saw in the monthly non-farm payroll report for July, when more than 150,000 private sector jobs were created. Other labor market indicators, such as the employment components of the ISM indexes and the ADP report, are also showing positive gains. None of these reports are strong enough to bring down the unemployment rate, but they are not indicating the onset of a fresh recessionary downturn either.