Asset Management

Markets rattled by slowdown in jobs growth

William Riegel, Head of Equity Investments
Lisa Black, Head of Global Public Fixed-Income Markets

April 5, 2013

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The second quarter got off to a rocky start for equity markets, as signs of a slowdown in U.S. economic activity and further worries out of Europe took their toll. The S&P 500 Index lost 0.6% in the first four days of April and was down another 1% in early trading on April 5 in the wake of disappointing U.S. jobs data. For the month to date through April 4, foreign developed and emerging equity markets lost 0.9% and 1.7%, respectively, based on MSCI indexes.

Article Highlights

  • Disappointing employment numbers cap a week of softer U.S. data.
  • Equities retreat from record highs, while Treasuries benefit from flight to safety.
  • Markets welcome Japan’s launch of aggressive monetary easing program.
  • Europe’s economy continues to downshift, dampening prospects for a second-half recovery.
  • U.S. growth shows signs of decelerating from first-quarter levels as sequester effects kick in

Bond funds saw continued inflows during the week, particularly in the investment-grade category. Treasury prices surged and their yields fell, reflecting investors’ preference for safety amid weakening U.S. and European data, as well as a purported increase in Treasury purchases by the Japanese government as part of its efforts to weaken the yen. The yield on the 10-year Treasury closed at 1.78% on April 4, a three-month low, and was trading below 1.7% after the March jobs report was released.

Sharp drop in job creation adds final jolt to uneasy week

U.S. economic releases for the month of March have generally been weaker than expected. Most notably, U.S. payrolls grew by only 88,000 last month, well below consensus forecasts of about 190,000. Although the unemployment rate ticked down to 7.6%, that was due to more people leaving the workforce. Employment sectors that are key to a more sustainable recovery were especially hard-hit, with construction jobs up only slightly (+18,000), and manufacturing (-3,000) and retail
(-24,000) down sharply.

During the past week, we also saw:

  • A jump in first-time unemployment claims for the second week in a row, to their highest level since last November
  • Slower expansion in both the manufacturing and service sectors of the economy, based on the Institute for Supply Management’s monthly indexes

On the other hand, some bright spots included:

  • A strong year-over-year gain in March auto sales, which came in at a robust annualized rate of 15.22 million units
  • Modest improvement in the U.S. trade deficit in February — not a change in trend, although the increase in exports was a surprise

Higher auto sales have prompted some industry observers to raise their targets for the year. Meanwhile, we expect the trade numbers for March to deteriorate somewhat as exports take a hit from a worsening situation in Europe.

Europe’s woes raise concerns, Japan’s monetary policy inspires hope

European headlines remained downbeat. Both fundamental economic weakness and policy uncertainty weighed on the markets, highlighted by:

  • Weaker-than-expected Purchasing Managers’ Indexes (PMIs), which measure both manufacturing and service-sector output, for the eurozone as a whole and particularly for France
  • Record-high eurozone unemployment of 12% in February, declared “stable” by the European Union only because January’s 11.9% was revised upward
  • Continuing concern about the Cyprus banking “bail in” — an economic non-event based on the country’s relative size, but a catalyst that has refocused attention on downside risks in Europe, especially in southern-tier nations such Italy, Spain, Portugal and Greece

European Central Bank (ECB) President Mario Draghi’s comments at an April 4 news conference did little to improve sentiment. While he again predicted a second-half recovery for the eurozone (a baseline forecast that is increasingly at risk), he did not have a firm answer as to what the central bank’s plan would be if such improvement failed to materialize. The ECB’s ability to provide meaningful stimulus has been severely limited by Germany’ reluctance to use expansionary monetary tools.

In Japan, however, the central bank delivered on a much-anticipated monetary easing program, exceeding the expectations of even the most enthusiastic “doves” (i.e., those who favor looser monetary policies to stimulate growth). In response to the new measures, the yen weakened dramatically, the equity market surged and inflation expectations were ramped up. All of these are widely considered positive and necessary steps to jumpstart Japan’s long-moribund economy.


The current U.S. economic picture is consistent with a decelerating pace of growth from the first quarter to the second as the effects of the sequester kick in. While first-quarter GDP growth should come in north of 3% based on data released so far, much of the strength will be from January and February, with activity slowing considerably in March. For example, the surprisingly low 88,000 jobs created in March obscured the fact that January and February payrolls were revised upward, to 148,000 and 268,000, respectively.

In fact, we believe that overall first-quarter growth was boosted by economic activity that had been delayed from the fourth quarter, when pre-fiscal-cliff fears kept consumers and businesses on the sidelines. We think a better view of underlying growth would be an average of those two quarters. In this light, we think the anticipated slowdown in second-quarter growth will not be as severe as the headlines will make it out to be.

Moreover, housing prices (up approximately 10% year to date), and the wealth effect created by equities should continue to support the economy via consumer sentiment and spending. In the first quarter, we noted a divergence between sentiment and spending, with spending stronger than sentiment levels would suggest. We look for consumer spending to soften moderately in coming months, but to remain positive year-over-year. In addition, given the weak March jobs report, the Fed is less likely to wind down quantitative easing (QE3) any time soon, lending further resilience to the economy.

That said, the risk remains that we could transition into another spring/summer slowdown, as we did in 2011 and 2012. Equity markets are already reacting to the more sluggish economic numbers and appear to be moving into a consolidation phase. This anxiety is reflected in the performance trends we have seen since March: As investors have grown more risk-averse, defensive sectors such as Healthcare and Consumer Staples have been the top performers, and large-cap stocks have bested small-cap shares.

Some research suggests that this sort of pause/rotation is normal after equity markets break to new highs, and that a new market peak, in and of itself, is not a “sell” signal. This is consistent with our own expectation that we are experiencing a short-term correction that will wring out some of the excesses that have crept into the market, most notably overly optimistic sentiment. Certain measures of short-term sentiment, including hedge funds’ net exposure to equities, have already begun to reverse. This sets the stage — if we are correct in anticipating further growth for the balance of the year — for a move to still higher levels on the S&P 500.