U.S. Employment: The Consequences Of Less Participation

Investors should focus on U.S. job growth rather than the unemployment rate. The latter is a victim of a stagnating labor force.

U.S. Employment: The Consequences Of Less Participation

T he labor force has not grown since the beginning of the recovery, and the labor force participation rate has actually been in structural decline since 2000. This rate is the percentage of the working-age population reporting themselves as either working or actively looking for work.

For much of the past four decades, the participation rate has trended up, but it has declined by three percentage points in the last decade. Such a decline is unprecedented in the post-war experience and has occurred both during the recession years and economic expansion. The participation rate for 25-54 year olds has held constant over the past two decades but 16-24 year olds participate much less in the work force, presumably because more years of education are now needed to find suitable employment. This has not been offset by the growing numbers of 55 years of age-and-over workers who are staying in the labor force.

There are long term consequences for the economy: trends in the labor force participation rate have a close historical relationship with long run productivity (higher participation rate means higher productivity) and thus need to be monitored. Unfortunately, it is difficult to extricate to what extent the downturn in participation is due to structural versus cyclical factors given the historically severe recession.

For these reasons, market participants would do better to focus on job creation rates rather than the rate of unemployment.

U.S. Equities: The Total Return Trap

High dividend yields hold appeal in a sluggish economic environment. But, investors should be wary of overpaying dividend streams in overvalued groups.

US Equities: The Total Return Trap

T he Fed stretched out its zero-rate expectations even further last week, reaffirming that low interest rates will remain a key feature of the investment environment. This would seem to continue to favor high-income-generating assets, but our U.S. Equity Strategy recommends that investors should be selective when looking for total return plays. Valuations of traditionally high-yielding equities are well beyond levels justified by underlying earnings. For example, equity fixed income proxies like utilities, telecoms and REITs are overvalued according to our industry valuation models. On the other hand, pharmaceuticals, integrated oils and hypermarket equities offer a high yield at prices that are not demanding versus their own relative valuation histories. Also, these equity groups (unlike the traditional high yielding ones) offer protection should long-term Treasury yields rise on the back of positive economic surprises.

Bottom line: Traditional high yielding equity sectors have very demanding valuations, and investors seeking total return should consider other less popular yield plays, including pharmaceuticals, hypermarkets and integrated oil & gas.