12th March 2013
The headlines about the US recovery have been very positive with the US adding 236,000 jobs in February pushing unemployment down to 7.7 per cent, but fund firm Blackrock says there are some data points in the jobs report that could dampen enthusiasm.
Blackrock’s chief investment strategist Russ Koesterich notes: “The report did show a substantial downward revision to January’s job growth numbers. Secondly, hourly earnings remain relatively stagnant, growing just over 2 per cent, which is barely keeping pace with inflation.”
Koesterich says this shows that new jobs are being created but not fast enough to push up wages.
“Additionally and perhaps most importantly, the labor force participation rate, which measures what percentage of an economy’s potential labour pool is actively working or looking for a job, fell to 63.5 per cent, the lowest level since August 2012. While this alone is unlikely to cause any near-term issues, a falling participation rate does have the potential to slow the broader economy’s rate of growth,” he says.
However he says that despite these negatives the report is good news and show the Labour market is continuing to heal, the economy is improving and can probably withstand the impact of the sequester – though it will drag on growth.
The manager suggests that some investors are becoming complacent and this may be revealed by falling measures of volatility.
He adds: “Stocks have been experiencing a strong run and the magnitude of recent gains is causing some indicators to flash yellow. After spiking a couple of weeks ago, volatility measures have fallen again, suggesting that some investors are becoming complacent. Additionally, corporate earnings growth has not been keeping pace with price gains, which means that valuations are slightly less attractive than they were a few months ago although we still think stock valuations are cheap relative to bonds and cash.”
He says that the rally may not be over but that it is with mega caps where fundamentals support prices.
“In particular, we think US mega caps look particularly attractive and offer compelling valuations and high profitability. In contrast, we think small cap stocks are looking relatively expensive. Small caps have outperformed other market segments on a year-to-date basis and we do not believe their fundamentals are as attractive as larger companies. As such, this may be a good time to take some profits from that areas of the market and reallocate to segments that are more compelling.”