Positive data revisions paint a slightly better picture of U.S. employment growth during the opening months of the year, but federal furloughs still present a significant hurdle this summer.

165,000 U.S. jobs were created in April, and prior months were revised higher. Including revisions, the 3-month average in payrolls has shifted to over 200,000 monthly gains. But we do not expect this pace to last: the impact of sequestration will only be evident in the data in May and beyond.

In addition, it is worth noting that although the unemployment rate ticked down slightly, the U-6 measure, which includes discouraged workers and the ‘underemployed’ ticked UP. This confirms our view that the official unemployment rate overstates the health of the labor market due to structural reasons.

In terms of Fed policy, policymakers may breathe a small sigh of relief knowing that payrolls have slightly improved during the past few months. But with core inflation barely above 1% and federal furloughs still in the pipeline, the doves still have a strong case.

Bottom Line: The better than expected April report will no doubt ease fears of a softening second quarter, but the impact of sequestration is still ahead. We expect a sustainable pick-up in trend payroll growth toward the end of the year.

Many domestic and defensive areas of the U.S. stock market dropped after guidance was weaker than expected in recent earnings reports. Conversely, many global industrial and materials groups rallied, as results and guidance were better than feared. This may be the beginning of a rotation in sector leadership, even if the overall market eases back.

H istory shows that defensive sectors can underperform during broad market pullbacks, albeit it has not occurred frequently. In the past 53 years, there were 12 periods when the S&P 500 corrected by at least 10% (excluding bear markets associated with recessions). Health care stocks underperformed during four out of these 12 occasions. In two of these periods, the health care sector had been outperforming heading into the broad market setback.

Consumer staples trailed the broad market one-quarter of the time during these overall market pullbacks, but had only been outperforming leading up to the correction on one occasion. Telecom services lagged twice, while utilities trailed only once, albeit after a period outperformance, as has recently been the case.

The message is that it would not be unprecedented for defensive sectors to underperform when the broad market is suffering losses. Thus, while it is tempting to label many non-cyclical sectors as providing ‘safe’ exposure to equities owing to their yield and diminished economic-sensitivity, there are risks to this strategy that may not be fully appreciated.

Our Cyclical Macro Indicators, valuations and technical trends all argue for maintaining a portfolio strategy focused on global cyclical sectors and groups, while de-emphasizing many ‘defensive’ areas that have been bid up into overshoot territory.