Pitfalls of the Unemployment Rate

Coming into 2014 the stock market was overdue for a pullback.  Concerns over a potential crisis in many emerging market economies ignited the January drop in the markets.  After a rocky start to the year, the S&P 500 has rallied over 5% since February 3rd to get back to break-even.  Economic data and earnings reports in February have not been especially good but stocks have bounced back as emerging markets have stabilized for the time being.

Dig a little deeper and a more interesting story is taking place in the bond market.  Last year bond prices fell, sending interest rates higher as investors became more confident in the economic recovery and on speculation the Federal Reserve would begin to taper its bond-buying program.  The yield on the 10-Year US Treasury rose from 1.83% on Jan 1, 2013 to 3.02% on Dec 31, 2013.

Now to 2014… as the stock market fell in January, investors ran to the safety of bonds sending the 10-Year yield down as low as 2.61%.  What is fascinating is that while stocks have recovered from the January losses we have not seen bond yields return to the 3% level.  In fact the 10-Year Treasury is currently yielding 2.64%.  In the past when there has been a significant variance between the stock and bond market it has been wise to follow what the bond market is telling us.  It is too early to make investment declarations based on the current variance between stocks and bonds but if bond yields continue going lower it will certainly be noteworthy.

Shifting gears, I came across an article this week in the Wall Street Journal that does a solid job in picking apart the over-reliance on the Unemployment Rate and explaining why this over-reliance is problematic.  While the jobs report from the Bureau of Labor Statistics may be the most important economic data released each month, it is the supporting data found in the report that is much more critical than the headline number itself.
Check out the article from the WSJ:

The unemployment rate, in short, is one of the most consequential numbers shaping our body politic. Unfortunately, it is also one of the most misleading.  The real problem is that the number, originally designed for limited purposes, has come to assume totemic status. Focusing so single-mindedly on this one employment figure has made it impossible to have a cogent discussion of labor in the U.S. and to design meaningful responses to our varied economic problems.”
For full article click here:  http://on.wsj.com/1fIe0qG

Global challenges

For the third straight year, summer is being welcomed in by a slumping stock market. This is something we warned about in our update on April 3.

Here is the latest on the situation:

Last week:

-By now I am sure you have heard plenty about the dreadful U.S. jobs report on Friday. There was an increase of just 69,000 jobs in May compared to expectations of 160,000 jobs added.

-Manufacturing activity in Spain plummeted to a three-year low. Germany and France also posted manufacturing figures at or near three-year lows.

-European Union statistics agency Eurostat said there were 17.4 million people without jobs in the 17 nations that use the euro in April. This is the highest level of unemployment ever recorded in the history of the European Union. The rise in unemployment is likely to add to discontent with the austerity programs underway in the euro member states.

-Brazil’s manufacturing sector showed contraction for a second straight month.

-Manufacturing activity in China slowed dramatically in May.

-This weekend, German Chancellor Angela Merkel doubled down on her opposition to joint debt sharing in the form of the euro bonds. If she does not change her mind it is hard to see how this crisis gets solved as it is apparent Spain, Italy, Greece and the others have no intention of real reform.

On the horizon:

-It appears to be a matter of time before the European Central Bank or the Federal Reserve attempts to ride to the rescue with some sort of stimulus plan.

-Will Spain’s 10 year treasury bond rise to 7%, a rate that would signal serious trouble

-Oil prices are down more than 20% in the last month. This should be a boost for consumers as well as for companies’ profit margins.

As always, we will continue to manage risk and look for opportunities!