Jobs Stabilizing; Recovery Hurts

The labor markets are showing signs of stabilizing, but the economic recovery continues to not feel like a recovery to many Americans. Last month, employers shed 263,000 jobs, pushing the unemployment rate up to 9.8%.

Though the drop in nonfarm payrolls was bigger than the consensus estimate had forecast, it was not unexpected. Yesterday, both the ISM manufacturing survey and the Monster Worldwide Employment Index suggested the number could be weak. Wednesday's ADP survey also foreshadowed a worse-than-forecast number.

Still, there are encouraging signs. The number of involuntary part-time workers (those who can't find full-time work) remains little changed since March. Health care providers continued to hire workers, creating 19,000 jobs. Hourly wages rose slightly, continuing a trend. The August job loss estimate was revised to 201,000 from 216,000.

The problem, however, is that many Americans remained either unemployed or underemployed. Employers in most sectors cut jobs again, including construction and manufacturing. Furthermore, average weekly wages declined.

Though the economy is moving in the right direction, the recovery will be slow, bumpy and painful. Despite optimism about a good third-quarter rebound, the economy is far from being out of the woods. This is why we're continuing to see calls for additional government intervention, such as a renewal of the first-time homebuyers' tax credit and another extension of unemployment benefits.

Whether the market has priced in this sloppy recovery is a question of debate. Before yesterday's pullback, the average Dow component was trading at about 19x trailing earnings, but at just 14x 2010 earnings. If the 2010 forecasts prove to be correct, there could be additional upside. However, given the prospects for a slow and painful economic recovery, a prolonged trading range seems probable -- as opposed to an extension of the 7-month rally.

Investors should therefore consider mixing growth stocks with less economically sensitive stocks. On the growth side, look for stocks with rising earnings estimates such as Texas Instruments (TXN - Analyst Report) or 3M (MMM - Analyst Report). On the more conservative side, consider companies with brighter prospects, such as General Mills (GIS - Analyst Report), or healthcare stocks trading at discounted valuations, such as Teva Pharmaceuticals (TEVA - Snapshot Report).

Charles Rotblut, CFA holds iShares Semiconductor (IGW) and Healthcare SPDRs (XLV) in Zacks ETF Trader.