Underemployment - Another Reason To Avoid Equities In Near Term

Includes: JNJ, SDRL, SPY, VHT
by: Disruptive Investor

The civil unemployment rate in the United States dipped to 7.8% in September from 8.1% in August 2012. On the face of it, the decline looks meaningful and creates an air of optimism about an improving economic scenario and labor markets. The reality is far from this as the real economy remains fragile and underemployment continues to be a major problem. This article looks into some of the major indicators pointing to continued weakness in the labor market and the reasons why the real unemployment rate will not improve in the foreseeable future.

The first indicator of continued weakness in the job market comes from the U6 rate. The U6 rate gives the total unemployed, plus all marginally attached workers plus total employed part time for economic reasons. Since the U6 rate captures part-time employment for economic reasons, the real labor market scenario is evident from this indicator. The U6 rate has remained stagnant at 14.7% at a time when the headline unemployment rate has declined from 8.1% to 7.8%. Clearly, there is no reason to cheer the decline in the headline unemployment as it does not indicate any meaningful economic recovery.

The CredAbility consumer distress index for employment is another good indicator of the real labor market scenario. The index inched up marginally from 59.4% in the first quarter of 2012 to 59.8% in the second quarter. The index is also reflective of the point that there has been no real improvement in the job market in the recent past as suggested by the headline unemployment numbers.

Going forward, the probability of improvement in the real unemployment scenario remains bleak as the U.S. economy weakens again. The weakness in the economy is evident from the Chicago Fed National Activity Index, which declined to a negative of 0.87 in September.

From an investment perspective, I would remain highly cautious on the markets as I expect a flurry of bad news over the next few months related to corporate earnings, employment and global economic growth. Also, one needs to understand that the fiscal cliff event is nearing along with the possibility of another debt ceiling debate in the next few months. The key point here is that the corporate sector will freeze on its expansion and employment amidst policy and tax change uncertainties.

However, over the long-term, the U.S. private sector should maintain relatively robust growth on global diversification. I would therefore look at any correction as a buying opportunity in equities.

Some suggested investment ideas -

SPDR S&P 500 (NYSEARCA:SPY) ETF - 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, SPY looks interesting. The ETF provides investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.

Johnson & Johnson (NYSE:JNJ) - I like this highly diversified healthcare company, with product as well as regional diversification. Further, the sector catered to by JNJ is not very prone to economic shocks. JNJ has been a good dividend payer in the past, with a dividend yield of 3.6%. In my opinion, the stock is excellent for a long-term portfolio. It also commands a higher rating than the U.S. sovereign rating.

Vanguard Health Care ETF (NYSEARCA:VHT) - The ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the healthcare sector. The ETF has a low expense ratio of 0.19%. In terms of sub sector exposure within the healthcare sector, the ETF has 45% exposure to the pharmaceuticals segment, a 15.8% exposure to the biotechnology segment, a 14.7% exposure to the healthcare equipment segment, and a 7.5% exposure to managed healthcare. In a weak economic scenario, exposure to VHT is a good idea as the sector is less prone to economic shocks.

Seadrill Limited (NYSE:SDRL) - I like Seadrill as it caters to the oil and gas sector, which I am bullish on for long term. Also, the company offers a high dividend yield. SDRL provides offshore drilling services to the oil and gas industry worldwide, is also an excellent long-term buy, in my opinion. The company has a diverse asset base of 24 drillships & semi-submersibles, 21 jack-up rigs and 21 tender rigs. Further, 18 newbuilds would serve as long-term revenue drivers once they come into operation in 2013 and 2014. SDRL currently has an order backlog of USD20.3 billion, which gives revenue visibility in the foreseeable future. Being the second largest ultra-deepwater player also serves as an advantage for SDRL in the long term. Investors can consider gradual accumulation of this exceptionally high dividend yield (8.5%) stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.