After Disappointing Jobs Data, Now What?

by: Russ Koesterich, CFA

Stocks tumbled Friday after disappointing May jobs data provided stark evidence that three years into the recovery, we’re still seeing few signs of a return to a more normal economy. Now, many investors are wondering what the report means for the U.S. economy and stocks going forward.

First, the implications for the economy: As jobs numbers tend to lag broader economic activity, the report doesn’t in itself suggest that the United States is slipping back into recession. It does, however, provide additional evidence, if any were needed, that the recovery is stuck in first gear thanks to the debt overhang of last decade.

In addition, it’s worth calling out that according to the new data, the United States created only 69,000 net new jobs in May, less than half of what economists were expecting and the slowest rate of net new job creation in a year. Meanwhile, wages for hourly workers are up just 1.4% year over year, the slowest pace since records began in 1965 and a sign that wages are not keeping pace with inflation. With job creation and wage growth at current slow paces, consumer spending is very likely going to slow down from last quarter’s relatively fast 2.7% pace.

Now, onto stocks. The report has three major implications for investors:

1) Stay defensive. A slow economy means more volatility so investors will want to consider maintaining a defensive posture. In particular, I continue to advocate that investors stick with a portfolio emphasizing high-quality, dividend paying funds such as the iShares High Dividend Equity Fund (NYSEARCA:HDV), the iShares Emerging Markets Dividend Index Fund (NYSEARCA:DVYE) and the iShares Dow Jones Select Dividend Index Fund (NYSEARCA:DVY).

And another defensive vehicle I believe investors should consider: U.S. and international minimum volatility funds. As of Thursday’s close, the iShares MSCI USA Minimum Volatility Index Fund (NYSEARCA:USMV) was down less than 4% from its May high. In contrast, the S&P 500 index was down 7.5%. Similarly, during the same time period, the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEARCA:EEMV) outperformed a broader emerging markets index.

2) Don’t expect big valuations. Equity valuations are likely to remain low for the foreseeable future.

3) Avoid Consumer Stocks. Assuming consumers do pull back, U.S. consumer discretionary stocks, which have outperformed year to date, look very expensive at 16.5x earnings and more than 3x book value. Investors in this sector continue to expect strong earnings growth of nearly 14% this year, a figure that looks very aggressive in an economy characterized by no real wage growth and slow job creation. As such, I continue to hold an underweight view of global consumer discretionary and U.S. retail stocks.

Disclosure: The author is long HDV.

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