Equities are now officially off to a poor start for the year, as the return for the Dow Jones Industrials in the first week and a half is -3.5%, and the Russell 2000 small caps are down 6%. Leadership is lousy, with no key sectors like banks or tech storming to the front of the parade. Historically, the first two weeks of January is often a harbinger of the rest of the year, so beware.

Utilities are flat, health care and industrials are down and staples are getting hit hard. Commodities like energy, mining and agriculture have been hammered, and regional indexes in Asia and Europe are also under attack. It all reminds me of the famous line from Casey Stengel after taking charge of the hapless New York Mets in 1962, "Can’t anyone here play this game?"

Maybe some companies can play this game, but they sure aren’t being real showy about it. Last year’s leaders, such as Wal-Mart (WMT) and McDonalds (MCD), have started the new year in a bad mood. And for every stock that has started well, such as discount retailer Family Dollar (FDO), education services provider Apollo Group (APOL) and farm equipment maker Deere (DE), there are many other companies in their industries that have started poorly.

Memo to bulls: This is no way to run a rally. If they really think that the worst is behind us, then they need to find a way to take advantage of bears’ post-November apathy. They need to find the wherewithal to put the pedal to the metal, ramp the volume way up and drive the market higher toward the 1,000 level of the S&P 500 while sellers continue to hang back. As I’ve been saying the past two weeks, if they don’t show more strength and volume very soon, then sellers will become more aggressive, the month will be a huge disappointment and another year will be lost.

The Truth About Job Losses

Why is this happening, just when things seemed to be going well for a while? Well, it’s the economy — it really is.

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When sentiment is strong and the economy is bubbling along at a moderate positive pace, investors ignore federal data releases. But when sentiment and the economy are already subpar, every data point is dissected and acted upon as if it’s a revelation from the gods.

The most important data point of all is employment, since naturally people without jobs don’t buy a whole lot. The problem with using job stats to help you as an investor in a bear market, though, is that employment tends to be a lagging indicator. Unemployment always rises long after recessions end and stocks have risen sharply.

So the key matter for investors now is to determine not whether unemployment is going to worsen, because everyone knows that it will, but whether it’s to worsen more profoundly and for a longer period than the consensus believes.

To help figure that out, let’s turn next to our ace employment analysts, Philippa Dunne and Doug Henwood. The pair, not normally given to hyperbole, described the numbers on Friday as a horror show, with every line bearing bad news.

Job Market Anaylsis

Total employment fell by 524,000, with almost every sector showing losses.

• Goods production fell by 251,000, with 101,000 coming from construction and 149,000 from manufacturing.
• Private services lost 280,000, led by professional and business services (down 113,000, with about three-quarters coming from temp firms)
• Retail (down 67,000)
• Leisure and hospitality was down 22,000
• Information was down 20,000
• Finance, down 14,000.
• The only group with gains was health care, +32,000
• Government added just 7,000, all in state and local

Private employment was down 2.4% for the year ending in December, the worst reading since 1982.

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Private services were down 1.5% for the year, its worst reading since 1958. Now this is very important: Private services’ lows in the deep recessions of the mid-70s and early-80s were -0.1% and -0.4% respectively, so this helps you understand the current magnitude.

Prior months’ numbers were reduced substantially. November’s loss was taken down by another 51,000, and October’s by 103,000. If you add up the initial prints, losses from September through November were 932,000; with all the revisions, however, the loss is now 1.4 million.

Average hourly earnings were surprisingly strong, up 0.3% for the month, with much of the strength coming from professional and business services, up 0.9%. Given the sharp contraction in temp employment, the rise probably reflected change in the job mix rather than actual wage pressures.

The workweek fell a sharp 0.2 to 33.3 hours, an all-time low that broke the previous record low of 33.5, set in October. Aggregate hours were down 1.1%, with goods in the lead (-2.3%), but services also sagging badly (-0.6%). December’s decline in aggregate hours was more than two standard deviations below the mean.

The broadest measure of unemployment, the U-6 rate, which accounts for unwilling part-timers and the marginally attached, rose an eye-popping 0.9 point to 13.5%. That’s a record high, though the series only begins in 1994. Note that in the 2001 recession, the biggest monthly increase was just 0.6 point.

Household employment surveys show that workers continue to look for jobs even in the face of discouraging news, since the participation rate fell by only 0.1 point. So hidden unemployment today is mostly found among the unwilling part-timers, not labor force dropouts.

So that was all pretty bad, though perhaps not as horrible as the ADP report on Wednesday had forecast. What’s next? Well, unfortunately, probably more of the same since forward-looking measures in the report, like temp employment and the workweek, were very weak, and the Conference Board’s Employment Trends Index is hitting fresh lows. It is apparrent that a very, very large fiscal stimulus is urgently needed.

Unemployment in Perspective

It’s important for us to understand how the market is taking this news. Initially stock index futures rose for a few minutes on Friday before the bell as the news was not as bad as many had feared. But then it seemed to dawn on people that for the second month in a row, the U.S. economy lost more than half a million jobs in one month. It appears that investors are now looking past the headline data and looking at the U-6 rate, which shows that if you forget about all the funny classification nonsense, we are at a serious new high of unemployment: The U-6 rate is up 55% year over year!

Moreover you need to realize that November and December are typically strong months for employment as manufacturers, transporters and retailers gear up for the holidays. In November of 2007, for instance, 307,000 jobs were added. This means that if conditions continue to deteriorate, a fiscal stimulus package that promises to put 3 million people to work over the next two years will only offset losses we can probably expect over the next six months. Bottom line: unemployment is probably worse than consensus believes, and will act to keep a lid on growth prospects through mid-year unless the stimulus package grows substantially.

Now keep in mind that employment cuts are obviously bad for the workers involved but they’re ultimately great for corporate earnings. Companies have to right-size themselves to bring their expenses in line with revenue. If they can cut costs faster than they lose revenue, they can maintain profitability even in a downturn — so long as there are enough people with money to buy their products, at least. As a result, we will be looking for companies that are in the forefront of job cuts because those are the ones that are dealing with the new reality the best and have the greatest prospects of being leaders in the next bull market.

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This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.