Jobs Report!!! On a Holiday???

By David B. Armstrong, CFA | Apr 06, 2015 | Weekly Market Commentary

As last week came to a close, the U.S. Bureau of Labor Statistics (BLS) reported that nonfarm payrolls rose 126,000 in March, which snapped a 12-month streak of +200,000 readings. Ouch.  On top of that there were fairly significant downward revisions to February (295,000 to 264,000) and January (239,000 to 201,000) readings. The unemployment rate held steady at 5.5%.

Taking a closer look at the numbers, the first three months of 2015 have averaged monthly growth of 197,000 versus a much more robust 324,000 in the final three months of 2014.

True, it was a rough first quarter and a lot of folks are questioning the overall state and health of economic growth.  TV is full of people questioning if equities are even worth holding.  (Spoiler alert: duh, have you SEEN bond yields and inflation?)

I Don’t Think It Is Anything To Get All Worked Up Over… Yet.

The markets remain edgy after a few months of news surrounding the increase in the U.S. dollar and fluctuating prices in oil. The bottom line is that people are still really worried post-2008 that the fragile growth that we have experienced will stumble and fail. Lately, it has been fear over the strengthening of the U.S. dollar stunting our economic growth.

Sure, the strength of the dollar has weakened corporate earnings expectations, but there are some benefits to a strong dollar too… PEOPLE WILL BUY MORE.  And when people buy more it tends to have a longer-term effect than a quarter or two of lowered earnings expectations.

Investors are also concerned about the pending start of the Federal Reserve’s rate hike cycle. Believe me, when they start, there is going to be some volatility in the markets.  Just look how the market hangs on every word coming out of the Fed.  Just speculating about when the hikes will start throws the market around… imagine what will be happening when it actually STARTS.  But, while there will be some volatility, it will be temporary because the hikes will indicate that we are seeing real growth in the economy.  This loose monetary policy was an emergency measure enacted back in 2008.  If the Fed starts to take it away, it may be less about inflation and more about the fact that they are confident emergency interest rates of ZERO are no longer needed to fuel the economy.  THAT’S A GOOD THING.

Even with the poor March employment report and the downward revisions to January and February, it’s not like the employment picture has turned into anything resembling a weekend riot on the campus of the University of Kentucky… the employment environment looks stable.

So What Do We Think? 

I think we’ll see the U.S. economy return to a sturdier course of growth over the next six months as weather improves.  Oh, and let’s not forget that lower oil is a massive source of stimulus for the U.S. and other economies around the world.

We are in the pro-growth camp.  While equity investing may seem challenging RIGHT NOW, we feel that looking farther down the road, there is a lot more pointing to growth than contraction. Interest rates will rise and bonds will not do well.  That’s not only my opinion but it’s pretty well grounded in academics as well.  Will volatility be high?  Sure.  Especially given the impending rate hikes and the cloudy short-term corporate earnings picture. If you need money to buy something over the next twelve months, raising cash and sitting on it is not a bad strategy.

It seems to us that we will see companies begin to profit from the falling commodity prices – essentially oil. It sounds like a broken record, but we like growth over value, small and mid-cap over large, more U.S. than developed or developing markets for now and cyclical sectors verses the defensive ones.

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