The labour market remains a frustrating source of weakness , according toRuss Koesterich, BlackRock’s Global Chief Investment Strategist.
On first glance, the December jobs report looked encouraging and confirmed a recent string of strong economic data. After all, the unemployment rate fell from 7.0% to 6.7%, its lowest level since the pre-financial-crisis days. Unfortunately, this news was, as the Texans like to say, “all hat and no cattle.”
First, the number of jobs created was well below the expected 200,000, at only 74,000 new jobs for the month, the lowest level we have seen in years. December’s poor reading also means that for 2013, average job creation was no faster than it was in 2012. Second, the drop in the headline unemployment number was driven by the fact that an increasing number of Americans are leaving the workforce. The labor participation rate fell in December to 62.8%, tying a 35-year low that was set last October. Finally, as we have been discussing for the past year, wage growth remains elusive. Hourly earnings increased by a paltry 0.1% last month, and the year-over-year change fell to 1.8%, the lowest level in over a year. The bottom line: While the overall economy is improving, the jobs market continues to lag.
Diversify Outside the US, Be Wary of Consumer Sectors, and Think About Your Treasury Duration
The weak employment data has several implications for investors. First, we would argue that weak jobs growth is one reason why it makes sense to diversify outside of US stocks. Although 2013 was a year in which investors were rewarded for overweighting US equities, we think broader thinking is warranted in 2014. For example, while the European economy is still struggling, that region is showing signs of improvement and is looking more attractive from an investment perspective. Although Europe is likely to grow more slowly than the United States on an absolute basis, its relative acceleration may be the more important factor for the region’s performance. This is not to suggest that investors should abandon the U.S., but for those who are overweight US stocks, the idea of diversifying their portfolio geographically makes sense.
Second, we would remain cautious toward consumer stocks-both the consumer staples and consumer discretionary sectors. With wage growth remaining depressed, consumption has been supported by lower savings and more “wealth driven” spending-an unsustainable trend, and one that suggests consumer-based companies may face a tougher road ahead.
Finally, while we continue to advocate that investors remain underweight Treasuries, we would point out that some segments of the Treasury market look more attractive than others. Given the increase in yields we have seen over the past year and the fact that inflation remains low and employment weak, long-dated Treasury bonds with yields of around 3% to 4% no longer look as overvalued as they did one year ago. Instead, we believe it is the short and middle parts of the yield curve (meaning Treasuries with maturities roughly between 2 and 5 years) where we would exercise the most caution.