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Global Outlook

A Banner Month For Jobs

July 9, 2014, Wednesday, 01:52 GMT | 20:52 EST | 05:22 IST | 07:52 SGT
Contributed by eResearch

The June National Employment Report issued by the ADP private payroll processer this week indicated that U.S. companies added 281,000 jobs last month, far more than economists had expected, and the best showing since November 2012. Although ADP’s numbers historically have not proven to be a great predictor of the official government tally, they raised hopes that the Bureau of Labor Statistics (BLS) will reveal a strong June jobs number.

"The job market is steadily improving. Job gains are broad based across all industries and company sizes,” said Moody’s Analytics chief economist Mark Zandi, who collaborates with the ADP on the report. The job strength shows, he said, that the economic recovery remains "fully intact and is gaining momentum.”

ADP’s June numbers suggest that hiring activity has recovered from the harsh winter. Previously, ADP’s jobs figures reached a high of 244,900 last November before plummeting to a low of 121,200 in January and then recovering and averaging 193,000 from February through May.

Nevertheless, Federal Reserve Chair Janet Yellen effectively warned observers not to rejoice too soon. Falling corporate bond spreads and volatility indicators suggest that investors may not fully appreciate the risk of future losses, she stated. She does not expect "monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

Among her concerns: that regulators "complete their efforts at implementing a macroprudential approach to enhance resilience within the financial system,” and accordingly "minimize the likelihood that monetary policy will need to focus on financial stability issues rather than on price stability and full employment.”

Yellen several times touched on the lack of full employment both in the U.S.A. and overseas, mirroring her prior remarks after policy meetings of the Federal Reserve Open Market Committee. In effect, Yellen confirmed that she will not raise interest rates until she is satisfied with the employment picture.

Yellen probably did not need this, but a cautionary note on U.S. employment has also now appeared from a review of public Current Population Survey files. A collection of Census Bureau data on employment growth over the last 14 years shows that, while native U.S. workers aged 16 to 65 accounted for two thirds of the growth in the number of potential American workers over that time, they accounted for none of the increase in the actual number of workers. Indeed, in the first quarter of 2000, 114.8 million U.S. native workers had jobs. In the first quarter of 2014, however, the number of U.S. native workers, at 114.7 million, stood at nearly the same level as 14 years ago, despite the dramatic increase in the available pool.

Jobless Americans include 8.7 million college graduates, 17 million workers with some college education, and 25.3 million with some high school education.

What this means for you is that income investments will continue to matter for the foreseeable future.

Furthermore, while we have not previously mentioned this, it is important to note that even if the Fed does begin to raise interest rates, and even if that were to occur much earlier than late in 2015 as is now broadly expected, any increase would leave rates at only a touch higher than zero, meaning that any sell-off in high-yield stocks, if we were to see one, would create a buying opportunity.

Fortunately, the second quarter ended on an up-note. After prices hit a momentary bump in the first quarter, coinciding with a pronounced slowdown in economic activity, stocks rallied in the second quarter on expectations for a rebound in growth, bringing the year-to-date return on the S&P 500 to better than 7% in the process. The blue chip index also extended its winning streak to six quarters.

We do foresee more indications that the economy is again on track to grow at a 2% to 3% annual rate this year. Of course, steep valuations could mean that in the near term—over the next few weeks—the market could experience at least a modest pullback of several percentage points. But, we think any decline would likely be followed by another stab at new highs.

Meanwhile, our portfolio continues to do well, and we envision a solid future especially for our energy plays, as the costs of extracting energy rise ever higher and demand for new energy sources continues to rise. Deep water drilling may temporarily remain oversupplied, but deep sea drilling is still one of the best plays in the energy patch.