Advisers may be breathing a bit easier after last Friday's lukewarm employment report dissipated concerns about a premature
Federal Reserve pullback from its quantitative-easing program.
Major market gauges such as the S&P 500 and the Dow Jones Industrial Average promptly jumped by more than a full percentage point on the news and closed the day at 1,643.34 and 15,248.10, respectively.
But advisers still suspect that the equity market is being held aloft by the Fed's hot air.
The central bank's support of asset prices has left many advisers wondering if the rally, especially the impressive gain this year of more than 14% in the S&P 500, is truly supported by fundamentals such as sales, earnings and profits.
'OUT OF TOUCH'
“We're still constructive, yet cautious,” said Neal Karchem, senior equity analyst at Bel Air Investment Advisors LLC. “The run-up this year seems to be a bit out of touch with the economic data,” which still show slow economic growth.
On Friday, the Labor Department reported that non-farm payroll positions increased by 175,000 in May and the unemployment rate inched up to 7.6%, from 7.5% in April, as the number of people entering the labor force surged. According to Bloomberg, the median forecast from economists called for a gain of 163,000.
Russ Koesterich,
BlackRock Inc.'s global chief investment strategist, called the non-farm-payrolls number “market-friendly.”
The jobs report indicated that the economic recovery is continuing, “but not so strong as to bring forward expectations of the Federal Reserve Bank reducing its asset purchase,” Abdur Chowdhury, chief economist at Capital Market Consultants Inc., said in a research note.
“There seems to be a sense that as long as the Fed is pumping liquidity into the economy, all will be OK,” added Steven Medland, a partner at TABR Capital Management LLC. “But at some point, everyone is going to rush to the exits, and it'll be ugly.”
Mr. Medland expects more downside for stocks within the next six months.
Bill Gross, founder of Pacific Investment Management Co. LLC, this month lambasted quantitative easing as a “new-age chemotherapy” that is killing future returns in all asset classes.
Beyond monetary policy, though, “the root of high capital markets' prices is competition among baby boomers who are finally getting around to investing for retirement,” said Chris Brightman, head of investment management at Research Affiliates LLC. “Low yields are a signal that [boomers are] going to have to work longer than expected, save more than they expected and consume less than expected.”
Investors perhaps have gotten a taste of their dreary future in recent weeks as bonds have sold off and popular bond substitutes such as real estate investment trusts and utilities stocks also have gotten hammered.
As such, many advisers have been looking overseas for growth, especially in emerging markets, but those areas have not been performing well, either.
“Europe is still in a
recession, which is the biggest export market for China, which is contributing to slowing growth” in Asia, Mr. Karchem said.
At the same time, U.S. stocks have appeared to be overpriced. The bull market is well into its fifth year, with the S&P 500 up 142% from a 12-year low in 2009.
Advisers, of course, are encouraging clients to think long-term.
“Everyone has been asking if the market is too expensive [and] why they should be investing if it's at a new high,” said John Robinson, owner of Financial Planning Hawaii Inc. “My answer is that it's supposed to go up over time. The market is not cheap now, but stocks certainly don't look like they did in 2007” at their highs.
Gregg Fisher, founder of Gerstein Fisher & Associates Inc., like Mr. Robinson, wants his clients broadly diversified over time. Investors can hedge disaster scenarios with commodities, gold and one-year bonds, he said.
Those asset classes “do better ... when inflation rises — but that's good for U.S. equities,” Mr. Fisher said.
And despite some head winds, Research Affiliates still likes the local-currency debt of emerging-markets countries.
“It is by no means riskless,” Mr. Brightman said, “but you get a higher rate, with better credit quality [than developed markets] and potential currency appreciation to boot.”
