By Gary Stringer, Kim Escue and Chad Keller, Stringer Asset Management
We expect economic fundamentals to continue improving in the developed markets, such as the U.S., the euro zone and Japan.
Though the May jobs report disappointed with total nonfarm employment increasing by 138,000 jobs compared to a 185,000 expectation, the U.S. economy only needs to create about 100,000 jobs per month to keep up with labor force growth and maintain our low unemployment rate.
Furthermore, with the unemployment rate at only 4.3%, it will be harder and harder for the economy to create blowout numbers of jobs each month. The current rate is roughly inline with the U.S. Federal Reserve’s long-term natural unemployment rate and it will be difficult for the current rate to decline further.
Even so, weekly initial unemployment claims remain low and job openings remain near record highs, which are encouraging signs (exhibit 1).
New orders, which is a leading economic indicator, recently surged according to the latest J.P.Morgan Global Manufacturing & Services PMI report. This move higher reflects the sharpest accumulation of backlogs since November 2013. In fact, we are seeing accelerating rates of production and hiring as the capacity of manufacturers and service providers is being challenged.
Emerging market fundamentals are more mixed, though investors seem to have shrugged off their risks. Our apprehension is focused on the dramatic increase in China’s level of private sector debt (exhibit 2) at a time when we view emerging market equity valuations as unattractive.
Based on price-to-book value relative to history, investors are willing to pay as much for the uncertainty around emerging markets as they are for large U.S. companies as represented by the S&P 500 Index (exhibit 3). We think the risk-reward tradeoff for emerging market stocks and bonds has become increasingly unappealing.
Stock market volatility has been subdued and is currently well below its historical average. Political headlines and other sources of other potential risks will likely have a greater impact on the markets and we expect a corresponding uptick in equity market volatility going forward. These risks may translate to negative days or weeks in the global equity markets.
While maintaining limited exposure to emerging markets, we think that investors should take advantage of down markets so long as developed market fundamentals remain solid and the U.S. Federal Reserve continues its current slow and steady course of interest rate hikes.
THE CASH INDICATOR
The Cash Indicator (CI) has declined significantly in recent weeks, which is not only reflective of the well-documented lack of stock market volatility, but also reflective of increased confidence in the credit market. While we expect volatility to increase from these low levels, the CI suggests that stock market declines are buying opportunities.
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Data is provided by various sources and prepared by Stringer Asset Management LLC and has not been verified or audited by an independent accountant.