Investors were greeted this week with announcements on job growth slowing and a World Bank forecast for troubles in emerging markets and advanced economies alike. From an investor’s perspective, should you be worried? Read on for Zacks Investment Management’s perspective…
A Tale of Two Jobs Data Points – the May job numbers sent shivers down the spines of those ready to write-off the U.S. economy. It was reported last week that the nation added just 38,000 jobs in May—well below the consensus estimate of 164,000, marking it the smallest gain in nearly six years. Despite slow growth, the unemployment rate fell three basis points to 4.7%. Fed watchers (and the Fed itself) erred on the side of caution, signaling that no one is comfortable enough with growth to see an interest rate hike in June. After jobs growth reports of 215,000 and 165,000 in March and April, respectively, this seems like an over-reaction. Interestingly, a second data point released on Wednesday signaled the opposite—a sturdy and healthy job market. Job openings hit a nine-month high in April and layoffs fell to their lowest level since September 2014. With initial claims for state unemployment benefits falling 4,000 to a seasonally adjusted 264,000 for the week ended June 4, the number of Americans filing for unemployment benefits also fell unexpectedly (according to the Labor Department). What can we make of all this? My response: the labor market is fine—not too hot and not too cold.
The World Bank Sees World’s Economies Slowing – the International Monetary Fund and the World Bank are notorious for revising growth estimates downward, and often being incorrect. So, when news broke of the World Bank’s warning of trouble in emerging markets and concerns about the growth path of advanced economies, we didn’t flinch. These organizations consistently make conservative forecasts which could be due to fear of being too off-target if they’re overly optimistic. Regardless, the World Bank is still projecting growth—seeing global growth coming in at 2.4% for the year versus the 2.9% they forecast back in January. For 2017, they think the world’s collective economies will grow 2.8%. Middling, but still decently positive and enough to support higher stock prices, in our view.
The European Central Bank Revs the Engines – this week, the European Central Bank (ECB) formally commenced its corporate sector purchase program with the ‘official’ buying list due out on July 18. In order to qualify for purchase by the ECB, the bonds must be denominated and issued in euros/euro zone, and must carry an investment grade rating. The end goal is to supply liquidity for issuers to raise more capital for investment (though who is to say they won’t take the borrowed money and just repurchase shares). Buying investment grade corporates should also put downward pressure on yields, which will make it cheaper for companies to borrow capital to fuel growth (again, in theory). This ECB program is meant to compliment the already heavy doses of bond purchases through Europe’s QE program.
George Soros Bets Bearish – in the hallways of just about every asset management firm this week, there was chatter about billionaire investor George Soros’ return to the trading desk after a nearly 10-year long hiatus. Surely something big must be on the horizon. According to Soros, he was “lured by opportunities to profit from what he sees as coming economic troubles” and has directed “a series of big, bearish investments.” His concerns mainly stem from China, which he rightly points out “continues to suffer from capital flight while depleting its foreign currency reserves.” Point taken, but a huge bearish bet would have to also include the assumption that not only does China not meet 6% growth, but they don’t grow at all. This is unlikely, in our view.
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