01-10-2014 01:09 PM
By Matt Freund
Chief Investment Officer, USAA Mutual Funds
Just when the Federal Reserve thought it was safe to start slowly dialing back its monetary stimulus program, out comes a surprisingly weak December jobs report that raises questions about how sturdy the economy actually is.
The Labor Department says the economy created only 74,000 new jobs last month. That number is barely a third of the consensus forecast for December, and less than half of the monthly average over the past two years.
Minutes from the Dec. 17-18 Fed meeting indicated that its decision to reduce its monthly bond-buying program from $85 billion to $75 billion was made in large part due to the steady gains in job creation. The Labor Department number fell far short of the 238,000 new private-sector jobs in December reported by payroll processor ADP earlier in the week. ADP said the manufacturing and construction sectors were notably strong during the month.
Which job number tells the more accurate story about the health of the U.S. labor market? We’ll get the answer to that question in the coming months. If December proves to be an anomaly, we expect the Fed’s gradual stimulus-reduction plan will likely stay on track. If the early months of 2014 also indicate weakness in job creation, the stimulus reduction may have to be revisited. The Fed’s recent cautiousness may give it room to maneuver without causing too much market upheaval.
Retail sales during the all-important holiday shopping season also proved weaker than hoped, with a number of major retailers giving notice that fourth-quarter profits will not meet expectations.
It’s still too early to see an overall earnings trend for the October-to-December quarter, but forecasts of earnings growth have been trimmed back during the quarter. We are concerned that lower earnings growth may mean the price-to-earnings multiples that expanded to above-historic levels in 2013 may not be sustainable.
And while earnings growth may be slipping, income-focused investors can take heart that dividend growth appears to still have traction. S&P Dow Jones Indices reports that dividends paid during the fourth calendar quarter grew by nearly $13 billion, and it predicts payouts will increase even more in 2014 as companies share more of their profits and balance-sheet cash with stockholders. Last year nearly 3,000 companies raised their dividends, according to S&P Dow Jones Indices.
For more on how we see 2014 shaping up for investors, please read our investment outlook.
USAA Investments Managed Portfolio Outlook
Our view of caution toward U.S. equities remains unchanged. We remain slightly overweight cash in our diversified managed portfolios. For investors interested in income-oriented bond investments, the USAA Intermediate-Term Bond Fund, the USAA High Income Fund and the USAA Income Fund are examples. For investors interested in tax-free income, the USAA Tax Exempt Long-Term Fund, the USAA Tax Exempt Intermediate-Term Fund and the USAA Tax Exempt Short-Term Fund are examples.
We also are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund also provides potential protection against the risks of long-term inflation.
Emerging markets represent another opportunity. Though they were hit especially hard recently, we believe that emerging markets remain attractive. They offer both an interesting long-term prospect for growth and compelling valuations. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based on your individual goals, objectives, risk tolerance and time horizon.
This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.
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