Relative strength for utilities and REITs in the stock world, as well as relative strength for investment grade debt in the bond universe, suggest that the Fed will barely bump overnight lending rates, if at all. Granted, the Federal Reserve would like to tell you the job growth is solid, even as chairwoman Yellen and her colleagues ignore the disappearance of high-paying manufacturing jobs on a daily basis. It has gotten so bad that, according to ADP, the manufacturing sector has experienced a net LOSS for 2015.
Is it any wonder that the extraordinary growth of part-time service workers alongside the loss of full-time manufacturing positions have contributed to significant declines in median household income? Should we ignore the reality that 19.5% of the 25-54 year-old, working-aged population is not participating in the labor force (a.k.a. unemployed) – a percentage that has increased every year from 16.5% in the Great Recession to 19.5% today? These are not “retirees” that we’re talking about here.
We are maintaining our lower-than-normal asset allocation for our moderate growth and income clients at Pacific Park Financial, Inc. During June-July, our equity exposure moved down from 65%-70% stock (e.g., growth, value, large, small, foreign, etc.), down to 50% (mostly large-cap domestic). Our income exposure moved down from 30%-35% (e.g., short, long, investment grade, high yield, etc.) down to 25% (almost exclusively investment grade).
The 25% cash component that we’ve been holding? We would need to see a desire for greater risk through greater pursuit of high yield bonds at the expense of treasuries. We would want to see a pursuit of capital gains over safety in a rising price ratio for PowerShares S&P 500 High Beta (SPHB):iShares MSCI USA Minimum Volatility (USMV). The fact that the SPHB:USMV price ratio is near its lows for the year tells me that it is still better to be safe than sorrowful.
Gary Gordon is president of Pacific Park Financial, Inc.