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Call #1: Maintain long-term overweight equities

While Friday’s unemployment report was not great, it does suggest that the United States is not on the verge of another recession — and therefore, equities look cheap. Stock valuations are now close to multi-decade lows, and equities look inexpensive particularly relative to bonds.

The September report — the latest economic report suggesting the risk of US recession is abating — was a significant improvement over August. The labor force didn’t grow fast enough last month to lower the unemployment rate, but the 100,000 new jobs created were well ahead of expectations. Equally important, August’s payroll growth figure was revised upwards to +57,000 jobs, meaning that month’s initial report of no new jobs created was incorrect.

When you take into account September’s number, the year-over-year change in payrolls is now +1.15%, the highest level since June of 2007. This is critical. As I’ve mentioned before, job growth is much more important than confidence when it comes to consumption. If the labor market is stabilizing, as appears to be happening, it should support personal spending. And support for spending is what we need if the United States is to avoid another recession.

I still expect soft growth for the remainder of 2011 and early 2012, and the situation in Europe will leave financial markets volatile for the foreseeable future. But in the meantime, a lower chance of a US recession means that earnings will slow less than the market is discounting. (Potential iShares solutions: IVV and IWV)

Call #2: Neutral on healthcare

One sector that no longer looks cheap: healthcare.

In light of the market’s increased volatility, I first advocated overweighting healthcare as a defensive play back in April, near the market top. Since then, many investors have flocked to the defensive sector. As a result, healthcare in the United States and globally no longer looks cheap relative to the broader market.

While healthcare stocks have fallen since April, they have held up much better than the broader market. From April through last Thursday, healthcare lost around 6%, roughly half the S&P 500’s losses. This outperformance, however, has led to a more expensive relative valuation for the sector. US healthcare, for instance, is now trading at a 20% premium to the broader market, as measured by price-to-book value. As a result, I’m ending my overweight view of healthcare and am moving to a neutral stance.

Call #3: Neutral on Peru

Finally, I’m ending my underweight view of Peruvian equities. I first went underweight Peru in late June based on what appeared to be an overvalued equity market. But since then, Peru has actually outperformed other emerging markets. Most economic indicators in Peru are also holding up relatively well. As such, Peru no longer looks expensive relative to other emerging market countries.

Source: Bloomberg

Disclaimer: Past performance does not guarantee future results.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country and narrowly focused investments may be subject to higher volatility.

Source: Equities Look Cheap, Healthcare Sector Does Not