Patience Will Pay Off in this Slowdown

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Includes: DIA, QQQ, SPY
by: James Picerno

There's no mistaking the trend now. The economy's slowing dramatically and the risk of recession is quite real, as Friday morning's dreary employment report for December strongly suggested.

As the Labor Department reported on Friday, nonfarm payrolls rose a thin 18,000 last month. As our chart below shows, that's the slowest pace for job creation in over four years. Adding to the labor market's woes is the news that the unemployment rate for December jumped to 5.0%, up from 4.7% previous. The jobless rate is now at its highest since November 2005.

One jobs report may or may not reflect the future, but it's tougher to overlook the broader trend over time. The economy's been creating fewer and fewer jobs for two years now, and we expect it to go negative. Yes, there are various reasons for that, and in any given month the trend changes. But there's no mistaking the slowdown now. When the largest economy on the planet has had a tougher time creating jobs for two years or so, one should take notice.

Even the services sector, the great source of strength for the economy over the past generation, is now showing signs of strain in minting new jobs. Consider that last month, the economy generated 93,000 new services jobs, down sharply from November's 160,000 gain. Meanwhile, the losses in construction and manufacturing jobs are accelerating and last month the tumbles there nearly overwhelmed the frugal gains in services sector.

It's any one's guess what comes next, but Friday's numbers are likely to cast a long shadow over investor sentiment until something dramatic arrives to persuade the crowd to think otherwise. In short, volatility is likely to remain in a bull market.

For strategic-minded investors who've been increasingly wary, and raised portfolio allocations to cash, all of this provides the potential for continued opportunity to pick up asset classes on the cheap in the coming weeks and months (and years?). No, it won't be easy, but successful investing never is as a long-term proposition. Nonetheless, those with a long-term view must stay vigilant and ignore the noise.

Just keep repeating the mantra that when it comes to asset classes, lower prices equate with higher expected returns. Realizing those higher returns won't necessarily come quickly or be an easy decision. But the combination of opportunity and patience will eventually pay off.

None of which is news to students of history. As Nathan Rothschild long ago counseled, buy when blood is running in the streets. Easy to say, tough to do. In fact, it's just the flip side of selling in roaring bull markets. If you believe in one, you should embrace the other.