Risk/Reward Vol. 261
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
‘I won't pay, I won't pay ya, no way
Why don't you get a job?
Say no way, say no way ya, no way
Why don't you get a job?”---lyrics from “Why Don’t You Get A Job” sung by The Offspring
“I'm dying to(o)
The sun will shine
The bottom line
I follow you”---lyrics from “Bottom Line” sung by Depeche Mode
“Why's this fussing and a-fighting?
I want to know, Lord, I want to know
Why's this cheating and backbiting?
I want to know, oh, Lord, I want to know now”---lyrics from “Fussing and Fighting” sung by Bob Marley
With both the Dow Jones Industrial Average and the S&P500 flat year to date, one wonders what the second quarter will bring. The employment news reported on Friday does not bode well for the economy and thus casts doubt on the markets. Only 126,000 jobs were added in March, well below the 245,000 that were expected. Moreover, adjustments to previously reported numbers lowered average monthly job growth for the first quarter of 2015 to 197,000 as compared to 324,000 in the last quarter of 2014. It appears that the answer to the question “Why don’t you get a job” is because “I won’t pay, I won’t pay ya, no way.” On the positive side was news that the unemployment rate remained at 5.5%, but even that was tempered by the fact that the employment participation rate fell to 67.8%, the lowest percentage since 1978.
So why has job growth slowed? Many commentators place the blame on an anticipated drop in corporate earnings. They fear that that this quarter and indeed this year “the sun will not shine” on “the bottom line.” One reason lies in the strong dollar. A strong dollar versus other major currencies has the effect of lowering foreign based revenue. A Euro’s worth of earnings last year at this time was worth $1.37. It is worth $1.08 today. Stated differently, the same amount of sales in Europe (Euros) this year means 26% less in reported dollar revenue. This has proven problematic for every major company with significant international operations and/or sales. In short, the strength of the dollar is a major headwind for earnings, and earnings are the major determinant of a stock’s price. With the average S&P500 stock trading at an historically rich 17 times expected future earnings, any drop in those earnings (even if the reason is solely the dollar/Euro exchange rate) will undoubtedly exert downward pressure on stock prices. Without earnings growth and stock appreciation, corporate managers will not hire.
So what does this all mean to an income investor such as yours truly? If next month’s job report also disappoints, we likely will not see the Federal Reserve raise interest rates in June. Indeed, the immediate reaction to Friday’s jobs number upon the yield of the bellwether 10Year Treasury Bond so portends, as it fell to 1.84%. For me, nothing is more important than knowing the timing and extent of any interest rate change. “I want to know, Lord, I want to know now.” The Fed itself will not tip its hand, but look for a public debate by and between individual Fed members and Fed watchers as rate hawks and rate doves engage in “fussing and a-fighting” over the next few weeks and months. In the meantime, I remain overweighted in cash.
Next week should prove interesting as Alcoa kicks off the first quarter’s earnings report season. Between earnings and Fed watching, I see a period of volatility in the markets with as many boo days as yea days. All the while, market commentators will be overreacting both to the positive and to the negative, as if taught by that noted financial journalist, Bob Marley:
“Come on and stir it up; ..., little darlin'!
Stir it up; come on, baby!
Come on and stir it up, yeah!
Little darlin', stir it up! O-oh!”
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