The month of September got off to a disappointing start when the equity market failed to hold a rally that was sparked by the better-than-expected ISM Index for August. 

The basis for the reversal, which left the S&P 500 down 1.2% at the close, was open for interpretation. 

Some of the more popular explanations included word that the Federal Reserve announced formal enforcement actions against Goldman Sachs (GS) for its residential mortgage loan servicing, the news that Greece isn't expected to meet its budget deficit target this year, a decision by Goldman Sachs to slash its payrolls forecast, and profit taking after the strong rally in the back half of August.

Another element we suspect factored into the retreat was the better-than-expected ISM Index.  Yes, it sparked the rally, but it proved to be a fire extinguisher at the same time.

The problem with the ISM Index for many participants was that it was a borderline number at 50.6.  That is, it was slightly above the expansion/contraction threshold.  That was good to see considering it was widely expected to reflect a contraction in the manufacturing sector; however, it was seen as perhaps being strong enough to keep the Fed from doing anything at its September meeting.

The latter, frankly, is a silly way to think.   At this juncture, we should want an economy running in such a way that it doesn't need added stimulus from the Fed.  If the market was convinced we are at the bottom of the current slowdown, we suppose it might have reacted better yesterday, but therein lies the problem.

The market is not yet convinced we are at the bottom.

Regrettably, reports this morning that the FHFA is poised to file a multi-billion lawsuit against a dozen large banks for misrepresenting the quality of mortgage securities, news that EU/IMF inspectors have "paused" their inspection into Greece's economic affairs, and the August employment report won't change that thinking.

The employment report, which is surreptitiously referred to as the unemployment report, showed nonfarm payrolls were unchanged in August and that private sector payrolls rose just 17,000.  Both numbers were well below the Briefing.com consensus estimates, which were pegged at 70,000 and 110,000, respectively.

In addition, there were downward revisions to nonfarm payrolls in June (from 46,000 to 20,000) and July (from 117,000 to 85,000).

The August report certainly falls into the disheartening category and it punctuates the importance of the president's job growth proposals that will be laid out in a September 8 speech.

Briefly, the unemployment rate held at 9.1% as expected; hourly earnings declined by 0.1% (Briefing.com consensus +0.2%); and the average workweek slipped 0.1 to 34.2 hours (Briefing.com consensus 34.3).

The drop in the workweek combined with the drop in hourly earnings are negative indications for spending and will contribute to estimates for weak GDP growth in the third quarter.

The knee-jerk reaction the futures market was decidedly negative.  Currently, the S&P futures are trading 1.7% below fair value, so it will be a noticeably weak start for the cash market.

Early selling interest could be tempered eventually, though, by the belief that the August employment report will be seen by Fed officials as a marker that they need to implement more monetary stimulus.

This on again-off again thinking with each passing economic report is going to keep the market volatile -- and, we might add, grumpy because it does not have a clear read through no fault of its own as to what is coming next.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.