Quick Comment On this Morning's Jobs Report

The Jobs Report — Wow!
The government reported a blowout jobs report this morning, which the financial markets should find supportive. The U.S. economy added about 313,000 jobs—nearly 100,000 more than forecasted. At the same time, average hour earnings grew 2.6% year- over-year compared to 2.9% last month. From an equity market perspective, the job numbers support the view that economic fundamentals remain strong. At the same time, for the fixed income markets, the reduced rate of average hourly growth will moderate concerns about inflation.

Investors will debate whether the Fed will focus on wage increases or strong job numbers or both. In our view, today’s numbers may reduce the probability of four Fed Funds rate increases this year. Our view calling for four increases represented a minority view. At the same time, we remain of the view that the Fed will tilt to four increases. Very simply, underlying it all, the Fed wants to put in place tools to deal with an inevitable economic slowdown.

Investment Conclusions
Today’s report supports continued economic growth and more importantly increasing earnings growth. For the equity markets to work through the Fed’s normalization process will require such strong earnings growth to offset the likely cap on valuations as interest rates rise. This tradeoff will likely be tested in the fourth quarter or early next year.

As the Fed goes through its interest rate normalization process and at the same time reduces its balance sheet, we continue to expect to see higher rates on long duration fixed income securities. This process will likely gradually build through the remainder of the year. The other unknown outcome in the fourth quarter, that will effect financial markets, will be the Congressional mid-term elections.

Our recommendations continue to focus on companies with strong earnings growth that benefit from the maturing of the economic cycle. Equities meeting this outlook would include industrials, financials, commodities, and—yes—tech. On the fixed income side, we continue to recommend shortening the duration of notes and bonds.