Waiting for Job Data Is a Waste
Memo to Wall Street: It’s time to move on. Time to find a new fixation, because the old one is on the verge of boring everyone to tears.
Every month this year, financial markets have nervously awaited the government’s employment report.
This stems from a long tradition among the ranks of professional money managers and analysts: There is an understandable tendency to believe that one statistic can tell investors everything they need to know about the next big move in stock and bond markets.
In the early 1980s, for example, there was a fixation on the weekly money supply numbers issued by the Federal Reserve. If a report showed faster-than- expected growth in the money supply, many investors would conclude that inflation was likely to accelerate -- seemingly bad news for markets.
Of course, one number is rarely, if ever, the whole story on any subject. But it’s tantalizing to think it could be so, especially when the number might be the answer to a relatively simple question: “Buy, sell or hold?”
So it is with the employment data. All year, Wall Street has regarded the monthly jobs creation figure as the preeminent economic barometer: strong number, strong economic growth; weak number, weak growth. With each report, investors would quickly draw conclusions about the direction of stocks and bonds.
But for the last four months, the monthly employment reports have been lukewarm at best. September’s numbers, issued Friday, showed the economy created a net 96,000 jobs last month. Many analysts had expected a number around 150,000.
Wall Street followed the script in its reaction. The stock market fell in apparent disappointment (a weak economy could mean the same for corporate earnings, after all), though the losses were modest. The Dow Jones industrial average gave up 70.20 points, or 0.7%, to 10,055.20.
In the bond market, the yield on the bellwether 10-year Treasury note fell to 4.13% from 4.24% Thursday. Why? Because smaller-than-expected employment gains could mean that the Federal Reserve will slow down in its campaign to raise short-term rates from generational lows.
The problem with these refrains is that they’ve become all too familiar. What would another six months of similar employment data do for, or to, investors? Spur them to action -- or put them to sleep?
Bond yields already have fallen sharply since mid-June, in part betting on a decelerating economy.
On the surface, the U.S. stock market has done a whole lot of nothing since late winter. Among major indexes, the Dow, the Standard & Poor’s 500 and the Nasdaq composite are just about where they were in mid-March. Since then, the nation has posted three months of robust job growth (March, April and May) and four months of subpar growth (June, July, August and September).
Yet under the surface, the market has been a much more interesting place than the benchmark indexes would suggest. Investors who have taken the time to look for moneymaking opportunities have found them in stock sectors as diverse as energy, real estate, steel and Internet commerce.
The action has been intriguing away from Wall Street, too. Last week, the Australian and Mexican markets hit record highs. In the first nine months of this year, the average foreign stock mutual fund posted a total return of 3.7%, according to Morningstar Inc. That was more than three times the 1.1% average return of U.S. stock funds.
The point is, you can miss a lot by waiting for one piece of data to determine your long-term investment strategy. This waiting, waiting, waiting for a big turn in employment could go on for months, even years. It’s possible the economy will generate middling job growth in perpetuity. But the future of financial markets won’t hinge solely on that factor.
Rational people can argue that there are plenty of other concerns holding back investment decisions. Who wins the White House in November? When will oil prices finally top off? And the (now) perennial: Will there be another terrorist attack on U.S. soil?
In a sense, nothing’s new. There always are good reasons to put off making portfolio changes. Viewed in retrospect, however, those reasons often lose their legitimacy.
If you’re a victim of inertia, here are two portfolio shifts worth considering -- ideas that might get you motivated to look beyond the next jobs report:
* Improve your “cash” returns. The Fed has raised its key short-term interest rate three times since June. Most economists believe that at least one more quarter-point increase will happen before year’s end, despite the economy’s lackluster job growth. That would lift the Fed’s rate to 2%.
Yet many investors still have hoards of cash sitting in bank savings or checking accounts paying less than 1%. Courtesy of the Fed, you don’t have to take a lot of risk to double your interest earnings. Six-month Treasury bills, for example, already yield 2%. And unlike bank interest, Treasury interest is exempt from state income tax.
Instead of leaving cash in low-yielding accounts, consider “laddering” it -- say, in three-, six- and nine-month bank CDs. You’ll earn higher returns, and some money will come up for reinvestment every three months. If rates keep rising, you can roll over the cash at better returns.
* Think globally about stocks and bonds. Many investors shunned foreign markets in the 1990s, keeping all of their assets in U.S. markets. It was the right decision: Domestic market returns far outpaced foreign returns in that decade.
But the reverse has been true for the last three years. The average foreign stock fund has risen 11.1% a year, on average, in that period, according to Morningstar. The average domestic fund was up 6% a year.
Many foreign economies are going their own way, independent of what’s happening in the U.S. economy. China, obviously, is a huge driver of global growth. And rising oil prices, a negative for the U.S. economy, are a boon to oil producers such as Russia and Mexico.
In the bond market, fixed- income securities of many countries overseas pay higher yields than U.S. bonds.
Is there more risk in foreign securities? Most likely. But foreign markets also can provide an important hedge against trouble in domestic markets, including a severe drop in the dollar.
Tom Petruno can be reached at email@example.com.