The U.S. Labor Department reported today that the pace of layoffs slowed in April when employers cut 539,000 jobs, the fewest in six months. The job cuts weren’t as deep as expected, but the new report underscored the toll the longest recession since World War II has taken on America’s workers and companies. However, the slowdown in layoffs may bolster expectations that the worst of the downturn’s hefty job losses are past.
“There are glimmers of hope. We are moving in the right direction in terms of layoffs. They are measurably less bad than what we’ve been through,” said Mark Zandi, chief economist at Moody’s Economy.com. That being said, companies will remain wary of hiring, making it harder for unemployed workers to find new jobs.
The U.S. may see unemployment rebound much quicker than in Europe. In a May 7th Wall Street Journal article, it was noted that European companies will most probably lag when it comes to hiring new workers. For example Germany and France have wage-tax burdens of 52.20% and 49.20% of their respective total labor costs. However, this current burden is estimated to be at 30.0% for U.S. companies. Economists expect the U.S. to stabilize much faster than Europe, and the International Monetary Fund predicts that overall European economies will continue shrinking next year, whereas the U.S. should bottom out by then.
Europe has been trying to rein in employment rules currently in place, which they consider to be a drag on growth, so they can emulate the faster-growing U.S. economy. Ironically, U.S. employment policies are moving toward Europe’s previous system.
For the time being, any slowdown in job losses will be a boost in consumer, business and market confidence.
Stress test results
As reported in today’s Wall Street Journal, the results of the government stress test are out, and 10 of the nation’s 19 largest banks will need to raise an additional $75 billion in capital to cushion themselves. However, some of the banks have vigorously contested the test results. Overall, the market has reacted positively to the news and financial stocks particularly (i.e., banks and insurance companies) have been on the rise as of late. However, it may be hard for them to keep appreciating at their current pace, and I would not be surprised to see them take a break in the upcoming months.
Will an upcoming economic recovery be sustainable?
There are signs that the U.S. economy is bottoming and will post solid growth in 2010. However, can this growth be maintained? The reason this comes into question is that currently (per the May 6th Wall Street Journal) U.S. corporate tax rates are the second highest of all developed countries. This is before the scheduled rise in taxes in 2011. In addition, at some point the Federal Reserve will need to raise interest rates to head off inflation. The combination of these two items will make a long-term and robust economic recovery challenging. An offset to that is that U.S. stocks, adjusted for inflation, are now priced as low as they’ve been in 41 years. This is the opinion of one wealth management firm in Hong Kong as noted in last weekend’s Barron’s Magazine.
Getting our toes wet
I continue to move some cash into the market. Please be aware, every client has a different set of circumstances, risk-tolerance and objectives. Thus, income-oriented and some balanced investments have been my main focus lately. For some of the younger or more growth-oriented clients, I am starting to nibble on equity investments (U.S. and international). In addition, I am beginning to accumulate some positions in natural resource (i.e., oil, gas, mining, etc.) investments.
I could be completely wrong; however, I believe this current market / stock run-up will take a break this summer. This is why, for funds currently in cash, I am considering this to be the first course of a four or five-course meal. I plan to make additional purchases in the months ahead. If you have any questions regarding how this pertains to your specific portfolio(s), please call me.
Events
“Is your life the way you want it?”
Strategic Life Planning Workshop, A Journey of Discovery
May 12 and June 17, 2009
Visit www.iia-kc.com/life-and-business for details and other programs such as “What Are You Made Of? Self Worth vs. Net Worth?” and “Are You Too Close to Your Business? Uncovering the Secret Weapon of Growth.”
Quotes
“Time gives good advice.” Maltese proverb
“Plants often removed never thrive.” German proverb
“I cannot say whether the market is as under-valued today as it was then (1974), but certainly we are seeing valuations for companies in our portfolios that are comparable to those of 1974.”
Bruce Berkowitz, Manager of the Fairholme Fund, Advisor Perspectives, January 6, 2009
It should be noted that the Dow Jones Industrials and the S&P 500, as of last night’s closing prices, still trade below their levels at the time Mr. Berkowitz made this statement. Only the NASDAQ is currently above those levels.
Tony Moeller, President
Integrity Investment Advisors, LLC
12721 Metcalf Ave., #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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