Some though not all advisors scrambled today to reposition their client’s portfolios in the wake of news that job growth in the U.S. slowed sharply in May.
Nonfarm payrolls grew by a 69,000 last month, the smallest gain in a year, according to the Labor Department’s report. And the unemployment rate, obtained by a separate survey of U.S. households, ticked one-tenth of a percentage point higher to 8.2%. That increase was the first in nearly a year and the latest indication that the economic recovery is losing steam. By way of background, economists surveyed by Dow Jones Newswires expected a gain of 155,000 in payrolls and for the jobless rate to remain at 8.1% in May.
Meanwhile, the major market indices collapsed on the news taking some by surprise. For instance, the Dow Jones industrial average fell 2.22% on Friday, the Standard & Poor’s 500 index 2.46%, and the 10-year U.S. Treasury note was trading at 1.46%. The Dow has now lost of its gains for 2012.
“I'd love to help you but I'm rotating portfolios,” says John Bergstrom, CFP, ChFC, LU, CDFA, of Cardinal Wealth Advisors. “I run tactical allocations and am rebalancing like crazy today.”
Other advisors, however, report not having to make any moves to their client’s portfolios on Friday.
For instance, Keith Springer, the president of Springer Financial Advisors, says he anticipated a slowing economy some six months ago and repositioned his client’s portfolio back then. Springer, in an interview, says he expected the effects of the stimulus to end in the second quarter of 2012 and began advising clients to “get away from risky assets and focus on income and dividends.”
At the moment, he says his average client has 45% invested in cash and short-term bonds and 45% in stocks that have higher-than-average dividends along with fixed-income investments such as intermediate-term corporate bonds.
“We want to keep our powder dry in case there’s a QE3,” says Springer, referring to what would be the third effort by the Federal Reserve to jumpstart the economy with some sort of stimulus. “If there is a QE3 we would be buying risk assets.”
Other advisers are also gunshy about stocks. “We have become very cautious on stocks,” Dave Caruso, CFP, the chairman of Coastal Capital Group writes in his weekly newsletter to clients. “Out of the seven major asset categories we use, we have no long equity positions. Virtually all of our funds are in shorter-term bond funds as we try to duck another potentially difficult post-May environment like the last two years. As you know, things can change on a dime, but right now we are only seeing about 30% of our 18,303 database positions as current buys and a mere 16% of our 12 major sectors remain positive.”
Meanwhile, Springer believes the Federal Reserve needs to launch another stimulus program to provide some life to the economic recovery. “The only thing that saves us is QE3,” he says. “Without QE3 we are dead.”
To be fair, Springer says the Federal Reserve’s two previous stimulus programs have hurt as much as they have helped. It’s created a wealth effect for those who have financial capital, he says. “But it’s also hurt the very same people it intends to help,” he says.
But the Federal Reserve is between the proverbial rock and hard place and it runs the risk of the U.S. suffering the same sort of malaise that Japan did for 15 years if it doesn't act, Springer says.