In my earlier article, I discussed four critical reasons for believing that equity markets are headed for a correction in the foreseeable future. Today's jobs report will act as another catalyst for a correction in equities. This article discusses the alarming points in the jobs report.
On the face of it, the jobs report might not look so discouraging with the headline unemployment rate falling to 7.6% and the U6 rate falling meaningfully to 13.8% from 14.3% in the last reading. The devil is however in further details.
According to the BLS -
In March, retail trade employment declined by 24,000. The industry had added an average of 32,000 jobs per month over the prior 6 months. In March, job declines occurred in clothing and clothing accessories stores (-15,000), building material and garden supply stores (-10,000), and electronics and appliance stores (-6,000).
It is rather alarming to witness a decline in job creation in the retail trade employment sector for an economy driven by consumption. With the festive season effect waning, the real test for the retail sector lies ahead. However, the employment scenario might not be very rosy in the sector considering the other critical negative factors discussed below.
The number of people not in the labour force surged to 89.9 million in March 2013 from a previous high of 89.3 million. With the number of people not in the labour force at an all time high, the headline unemployment rate and the U6 rate look relatively bright.
However, as more people opt out of the labour force, the pressure on the working population is bound to increase. This factor is further illustrated by the civilian labour force participation rate, which is at its lowest since 1979. Currently, the labour force participation rate stands at 63.3%. At the same time, the civilian employment-to-population ratio also ticked lower to 58.5%.
All these three numbers suggest that consumption will take a hit going forward with the population dependency surging amidst weak economic and salary growth. At the same time, the social benefit will continue to remain higher resulting in persistent pressure on government finances.
The fact that only 88,000 new jobs were created in March is an indicator of the sluggishness coming in the private sector due to a slowdown globally and the gradual crowding out effect. It is therefore not surprising to see the equity markets reacting negatively to the jobs report and the government bond yields declining significantly. There is a flow of money towards relatively risk free assets. In my opinion, this trend will continue over the next few months and equity markets might not be the best place to be for the near-term.
Investors would therefore be better off in cash and short-term government bonds in over the next 3-6 months than being in equities. It is certainly not a suggestion that equities might no longer be attractive. However, a correction for equities is imminent and a bull market for cash might be underway.
If markets do correct by 10-15% over the next few months, investors can consider exposure to the index. It has been proven that beating the index is not an easy task. Therefore, the strategy should be simple -- beat the index or invest in the index. From this perspective, SPDR S&P 500 ETF (SPY) looks interesting. Also, with excess money flowing into risky asset classes, the S&P should trend higher over the next 3-5 years. Therefore, the expected correction can be used to consider fresh exposure to the ETF. The ETF provides investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.