Jobs Report Creates More Questions Than Answers
Last Friday’s monthly employment report was, on the surface, encouraging to hopes for economic recovery. Stock benchmarks jumped on the news. Such reports are always subject to interpretation, yet this time the disagreements are taking longer to resolve.
The prime issue is whether the drop in the headline unemployment rate to 8.3% really means anything, coming as it did coincident with some statistical adjustments. Analysts spent the last few days debating things like the “participation rate” and precise definitions of “labor force.” On Tuesday, no less than Ben Bernanke himself weighed in. Responding to questions from the Senate Budget Committee, the Fed chairman said the 8.3% rate “no doubt understates the weakness of the labor market in some broad sense.”
Bernanke rightly pointed out that the unemployment rate reflects only people who are actively seeking work. Americans who hold a job at sharply lower pay than the past, or have accepted part-time work, or started new businesses, or taken early retirement, or simply given up after a year or more of fruitless job-seeking, do not count as statistically “unemployed.” Yet they exist, and their numbers are arguably growing. Any progress is encouraging, of course, but Bernanke seems aware that the present tepid recovery has a long way to go.
How is this consistent with a bullish stock market? The Fed has pledged to keep interest rates near zero until at least 2014. Capital is cheap for investors with a decent credit rating, and more “quantitative easing” is a pretty good bet. This is bullish for risk assets and most bullish for some of the riskiest assets. We see this manifested in micro-cap stocks at the head of our Style rankings and gains in bank stocks.
Treasury bond yields are staying stubbornly low for similar reasons, with the ten-year rate still below 2%. The rest of the world views the U.S. as a safe haven. As long as that attitude persists, the day of reckoning can be postponed.
Last week’s top three sectors – Materials, Industrials, and Financials – top the list again today but with a little reshuffling amongst themselves. Financials now hold a small edge over the other two groups. None of the three is far enough ahead to be called a clear leader. Technology is a close #4, and Consumer Discretionary rounds out the top half of the list. Energy stocks had a strong week and could soon move ahead of Health Care. The laggard trio is also the same as last week: Consumer Staples, Utilities, and Telecom. Telecom had a good week and escaped the bottom, replaced by Utilities.
The stars behaved as expected and brought the inverse-capitalization pattern into perfect alignment. Micro Caps are on top, followed by the three Small Cap categories, then the three Mid Caps, the three Large Caps, and Mega Cap on the bottom. This is consistent with generally bullish market conditions. Stocks are past due for a correction, and the extent to which the next shake-up changes this alignment will indicate the bull’s staying power. One positive sign is that each capitalization group is further stratified with Growth ahead of Value. That said, dispersion is still small within each group and could change quickly.
Emerging Markets moved up from second place to become the new global leader. Latin America is close behind and could take the top spot soon. Previous leader China, now in third place, took a relative breather the last week. We say “relative” because China had a positive week but less so than Latin America. The U.S. held on to its #4 position. Europe continued to bounce on hopes for clarity in the Greece situation. Gains in the Euro were also helpful. Canada is still unusually weak, given that the Materials sector and Canadian Dollar both look bullish. If Energy continues to rally, we may see Canada move up the list. Japan performed well, as it has done the last few weeks, but not well enough to escape last place.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“We still have a long way to go before the labor market can be said to be operating normally.”
Ben Bernanke to Senate Budget Committee on 2/7/12
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