Though last Friday’s better-than-expected payroll report was a relief for those worried about another springtime swoon, it also showed that monthly job creation has barely budged in two years and wage growth remains tepid. In other words, the report provided more evidence that the labor market is still only gradually improving and confirmed my expectation of slow US economic growth in 2013.
However, as I write in my latest weekly commentary, this isn’t necessarily bad news for US stocks. Here are two reasons why.
- Economic growth is just about fast enough to provide some support to corporate top-line growth. At the same time, slow growth is holding down costs and supporting corporate profitability. A slow economy means that the two big input costs – wages and capital – remain historically cheap.
- With job creation stuck in second gear, the Federal Reserve is likely to keep monetary conditions accommodative and rates low. This means ample liquidity, which should continue to help stocks move higher.
So assuming that US stocks continue to slowly push ahead, as I expect, how should investors consider playing the advance? The composition of the rally is starting to change. First, large and mega caps are now outperforming small caps. Also, some of the more expensive defensive sectors – like utilities – are beginning to underperform. At the same time, the technology sector looks cheap compared to its history.
As such, I continue to particularly like US mega caps and the technology sector, accessible respectively through the iShares S&P 100 Fund (OEF) and the iShares Dow Jones US Technology Fund (IYW).
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.