Markets Will Likely Weather Jobs Report
January 10, 2014
Today's job growth report fell short of economists' expectations, with the Labor Department reporting a gain of 74,000 jobs in December. We believe the market will overlook the weak December employment numbers. The calendar was compressed with Thanksgiving coming late; the weather was bad; and if one considers both November (which was revised up) and December data, the average monthly job growth has been a respectable 160,000.
At the margin, the employment numbers could allow the Fed to take a more gradual approach to tapering or adopt a "wait and see" approach. The December numbers are also inconsistent with the other stronger economic data we’ve seen over the past few weeks (such as ISM manufacturing data, new unemployment claims, ADP’s private sector job growth report, and the trade balance), which has caused consensus estimates for fourth quarter GDP growth to double to around 2.5%.
In our view, stocks remain cheap by many measures. Equity earnings yields of 6.3% (inverse of a forward P/E estimate of 16x for the S&P 500 for 2014 and earnings per share of $115) provide a 340-basis points advantage relative to 10-year Treasury yields at about 2.9%. At this level, the equity return premium still ranks among the most attractive over the past 60 years, and inflation pressures remain subdued.
Globally, Europe and Japan continue to rebound economically, and emerging markets remain stable. Quarterly earnings will move to center stage starting next week. Other than retail and restaurants—which like the employment numbers were similarly affected by the compressed calendar and weather—we believe most sectors are likely to do better versus reduced expectations.
We continue to like equities, and growth equities remain cheap relative to value equities, in our view. We would use the recent market pullback to add to higher growth names with strong franchises in sectors that benefit from secular shifts to mobile, the cloud, and internet/social media; consumer discretionary names tied to housing and autos; and financials that may benefit from the upward slope in the yield curve, increased lending, and stronger equity markets.
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
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