NOLTE NOTES
Employment Report, Equity and Bonds
by Paul J. Nolte, CFA
April 5, 2010

What was expected to be a blowout employment report, turned out to be consistent with those in the past – better than the prior, but certainly nothing to get really excited about. Yes, there was some hiring in March, less than expected from census workers, manufacturing continued to pick-up and the fudge factor called the birth/death model (designed to capture new business formation/closing) added another 80,000. For the first time since the recession began over two years ago, employment has begun to hook up. Since WWII, this recession has cost more workers their jobs (as a percent of peak employment) and has lasted longer than even the “jobless” recovery of 2001-2003. Prior recessions have had quicker snapbacks in employment, as manufacturing was a larger percentage of the total employment picture. Given the large and sluggish service sector and the ties of employment to the overall economy, our best guess is that whatever recovery we see will likely be very slow – like the flu that you just can’t shake. We’ll get a picture of the service economy this week along with some early real estate data that is likely to confirm the slow recovery in both parts of the economy.

The equity markets continue their march higher either not concerned about the less than good overall economic data or hoping the future looks much brighter. Expectations for earnings growth are around 20% for the next two years, however what has been left off the analysis is revenue growth. Earnings season gets started in another week, so the markets will likely take their cue from the economic data stream. What qualifies as a “market correction” has been getting shorter and shallower – sometimes lasting an hour or two and dropping less than 1%. What has been keeping the markets going has been the breadth of the advance, as many more stocks are advancing than declining. Until that dynamic changes, it is likely that the path of least resistance for stocks is higher. There are some warts on this market that could spell trouble in the future (like lack of volume on the market rises vs. market declines), but for now, investors are happy buyers. Whenever the correction comes, we are expecting yet another attempt at yearly highs before a more significant decline unfolds later this year.

The decline in bond prices (and increases in yield) has continued, as investors are increasingly concerned about the strength in economic recovery (forcing the Fed to raise rates earlier than expected) or the heavy amount of debt issuance to fund all the bailouts (higher yields to attract investors). What has been surprising is our bond model remains at a “buy”, indicating that this backup in rates is not likely to persist and that yields will once again turn lower. One likely cause may be weakness in economic data or earnings in the next few weeks. What is certain is the amount of debt issuance, which may keep rates artificially high, impacting mortgage rates and keeping any recovery in real estate somewhere in the ethereal future.

© 2010 Paul J. Nolte, CFA
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The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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Paul J. Nolte, CFA | Managing Director, Dearborn Partners
Chicago, Illinois | (312) 334-7123 Tel | Email | Website