03/11/15   Rate Hike Heebie-Jeebies

Editor’s Corner

Ron Rowland

The Bureau of Labor Statistics (“BLS”) released its Establishment Survey and Household Survey reports for February last Friday. According to the Establishment Survey, employers added 295,000 people to their payrolls in February, the twelfth month in a row of payrolls growing by 200,000 or more. The 1-year total is 3.3 million new jobs for a monthly average of about 275,000. When added to the previous base, this puts the total count of non-farm employees at 141 million.

The Household Survey has different figures. It puts the number of people joining the ranks of the employed at just 96,000 in February, which is 67% lower than the Establishment Survey. The year-over-year increase of 3.0 million in the employment ranks shows better correlation to the Establishment Survey by being “just” 10% lower. However, the total quantity of employed civilians goes the other direction with the Household Survey reporting a 5% higher figure of 148 million.

Using annual data theoretically removes any inconsistencies introduced in the seasonal adjustment process. Let’s look at the Household Survey’s employment growth of 3 million in light of other annual figures. The civilian noninstitutional population grew by 2.8 million. The BLS claims that 1.3 million joined the labor force, and it counts the other 1.5 million as not being in the labor force. Therefore, the majority (53.6%) of population growth escaped being part of the unemployment rate calculation.

A year ago, 58.8% of the population had jobs. Today that figure stands at 59.3%. The 0.5% increase is certainly welcome, but it doesn’t approach the gains typically seen in economic recoveries. However, the official unemployment rate improved a whopping 1.2%, dropping from 6.7% a year ago to just 5.5% today. If just 0.5% of the population found jobs over the past year, then how can the unemployment rate improve by 1.2%?

The answer lies in the 1.5 million jump in the number of people not in the labor force. The math goes like this: a year ago, there were 10.4 million unemployed from a labor force of 155.7 million for a 6.7% unemployment rate. Today, there are 8.7 million unemployed from a labor force of 157.0 million for a 5.5% unemployment rate. Only 1.7 million of the unemployed got jobs, while the number of people excluded from the unemployment rate calculation grew by 1.5 million to 92.9 million.

Markets seem to have interpreted all this as a green light for the Fed to begin raising interest rates in June. However, this is a case where good news is bad news. The good economic news means the Fed will increase interest rates, which is seen as bad news for both stocks and bonds. Last year we had the taper tantrum when markets reacted negatively to the thought of the Fed’s asset purchase program winding down. Now, the markets appear to have rate hike heebie-jeebies.

Investor Heat Map: 3/11/15


No sector sidestepped the negative market action of the past week.  Consumer Discretionary is on top again, although that could change rapidly if the broad market continues to weaken.  Health Care climbed a spot to grab second place, but it was a hollow victory since it was accomplished by falling less than other sectors.  Technology slipped to third.  Industrials and Materials swapped places and lost most of their upward momentum.  Financials edged two spots higher while Consumer Staples slid one place lower.  Both are barely hanging on to their remaining slivers of positive momentum and are vulnerable to slipping into negative trends.  Telecom and Real Estate were both in the green a week ago but today find themselves in the red.  Energy and Utilities sunk deeper into the red, and Energy is on the verge of reclaiming the last place ranking it held before Utilities began its four-week occupation.


Small Cap Growth extended its time on the top to seven weeks and doubled its margin over Mid Cap Growth.  Micro Cap continued its quiet climb up the rankings by moving up to third and pushing Large Cap Growth down to fourth.  Although Micro Cap has inserted itself into the mix, the Growth categories still dominate the style rankings.  The three Blends occupy the middle ground again, although their order has changed slightly with Small Cap Blend moving ahead of the other two.  Mega Cap is next in line, wedged between the Blend and Value categories.  Mid Cap Value and Small Cap Value barely managed to keep their momentum scores in the green.  Meanwhile, Large Cap Value fell short of that goal and slipped into a slightly negative trend.


Japan was the only global category able to post double-digit positive momentum today, and that kept its three-week streak in the top spot alive.  The U.S. jumped three spots higher in the rankings, as a strong dollar helped it keep its losses smaller than other regions this past week.  EAFE and Europe held their third and fourth-place spots but lost most of their momentum in the process.  World Equity and the U.K. both moved up a notch, but the U.K. flipped over to red.  China was the big loser from a relative strength standpoint this week.  It fell from second to seventh and into the red, as the Chinese government lowered its economic growth forecast to 7%.  Four global categories moved from green to red this week.  Pacific ex-Japan is the third one and is now in a tight race with the U.K. and China.  Emerging Markets is the fourth category to flip over to a downward trend, and it is already posting double-digit negative momentum scores.  Canada moved deeper into negative territory as both its weak currency and large exposure to the energy sector took their toll.  Latin America posted the largest declines in absolute strength this week, but it was already on the bottom and couldn’t fall any further in the relative rankings.  However, its momentum score of minus 61 gives an indication of how bad things are for the region.


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.


“There’s all sorts of volatility surrounding the magical date when the Fed will raise interest rates.”

Bernie Williams, Chief Investment Officer at USAA Investment Solutions, 3/10/15


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