Despite being the most widely anticipated labor market report in years, Friday’s jobs data merely showed more of the same.
It confirmed my expectations that the recovery is continuing to chug along slowly, that rates will continue to slowly rise and that the Federal Reserve won’t wind down its easy money before the fall. While the report doesn’t change my economic outlook, it does have six implications for investors:
1.) Prepare portfolios for more volatility. Stocks ended last week on a strong note. But they sank around 5% from May’s closing high to last week’s lows, and both stocks and bonds ended last week close to where they had started the week. Meanwhile, implied volatility recently hit the highest level since February. As investors continue to worry about the end of easy money and remain anxious ahead of key economic reports, markets are likely to remain volatile.
2.) Minimize exposure to Treasuries as rates continue to slowly rise. Last week, Treasury bonds once again came under pressure, with yields rising sharply on Friday. I expect rates to continue to grind higher over the remainder of the year.
3.) Consider underweighting defensive sectors, such as utilities. The utility sector, often seen as a bond proxy, is likely to come under more pressure from rising real interest rates.
4.) Expect continued pressure on other rate-sensitive dividend plays, notably REITs. Despite recent underperformance, US REITS still look expensive by most measures.
5.) Consider overweighting cyclical sectors such as technology and energy. These sectors are likely to benefit from investors’ continued rotation out of defensive sectors such as utilities and are accessible through funds such as the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) and the iShares Dow Jones U.S. Energy Sector Index Fund (IYE).
6.) Consider trimming gold holdings. While I still advocate that investors should maintain a strategic position in gold, rising real interest rates will continue to put pressure on gold. This is why gold prices dropped sharply on Friday after the jobs report.
All of this, of course, is what I’ve been advocating a lot lately. To paraphrase Macbeth, for all the “sound and fury” proceeding last Friday’s non-farm payroll number, it signified “nothing” much new, even though this was enough to spark a Goldilocks rally.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.