Well. That was a very nice rally yesterday. Volume picked up
and stocks closed at their highs of the day. Energy stocks did great and so
did the financials.

Now, the underlying catalyst for the strength in the stock
market — that the Fed is on the verge of another round of quantitative
easing — may not be the catalyst we’d choose. I’m sure we’d all prefer that
stocks were rallying on strong economic growth prospects.

One of the issues that has been hampering economic growth is
the velocity of money, or lack thereof. Government bailouts helped fix banks’
balance sheets. And they’ve been able to raise immense amounts of money and
return to strong profits. But for the most part, all that cash is just
sitting there.

When money sits, instead of getting spent or invested, it
creates a deflationary situation. The Fed hopes that by continuing to push
yields lower, it can force some of that sideline cash into the system.

Of course, the big risk is an even weaker U.S. dollar and
the potential for inflation.

This morning we got
a taste of what Friday’s Nonfarm payroll number might look like. And it
wasn’t good. The
ADP payroll
number showed that
U.S. companies cut 39,000 workers in September. The median estimate from
economists was a gain of 20,000 workers.

Of course, we know the job market is in bad shape. The pace
of layoffs and firings has slowed, but hiring is picking up very
slowly.

Now, the ADP report has not been a great indicator for the more important Nonfarm
payroll report. And the stock market is certainly brushing off the

ADP report.

Still, I suspect that stocks will be vulnerable if Friday’s
payroll number is negative.

The IMF says that
the global economy will grow 4.8% this year. And at 2.6%
GDP growth, the U.S. is lagging. Next year, the IMF
expects
U.S. growth to be a
bit better, at 2.8%.

Let’s remember that second quarter growth this year was an
anemic 1.7%. The economy felt slow that quarter, and we heard plenty from
CEOs that the business outlook had taken a turn for the worse.

2.8% is far better. That’s enough growth to support earnings
and get some people back to work. But growth needs to be stronger to really
put a dent in the unemployment rate.

Can the Fed’s next round of stimulus help employment.
Probably not. The Fed may be able to create conditions that favor hiring, but
companies hire when they think they need help, and that’s a matter of
confidence in the economy.

Of course, I’d like to hear your thoughts here: [email protected]

Published by Wyatt Investment Research at