Job Growth Cooled in June. Reported Data Might Still Be Too High.

Although the pace of job growth slowed sharply in June, the average length of the private-sector workweek ticked up by one-tenth of an hour, providing a powerful boost to growth in aggregate private-sector labor earnings. Job growth was less broadly based across private-sector industry groups in June, continuing a concerning trend we’ve been highlighting in recent months.

While the unemployment rate fell to 3.6% in June, the broader U6 measure, which also accounts for underemployment, rose to 6.9% from 6.7% in May on a jump in the number of those working part time for economic reasons.

It is also worth noting that on Aug. 23 the Bureau of Labor Statistics will release a preliminary estimate of the annual benchmark revision to the establishment survey data, in which the monthly estimates of employment, hours, and earnings are benchmarked to the universe of payroll tax returns. Based on our take of the Quarterly Census on Employment and Wages, drawn from the payroll tax-return data, BLS has been significantly overestimating job growth over the past few quarters.

Whether or not the June employment report changed anyone’s view of labor market conditions, if we’re correct on this point, the annual benchmark revisions certainly will.

Richard F. Moody

Recession Indicators Flash

Economic and Financial Markets Review

Cumberland Advisors
July 6: Leading indicators of recession continue to point strongly toward a downturn, even if it hasn’t started yet. The Conference Board’s Index of Leading Economic Indicators (LEI) has now declined for 14 consecutive months, and May’s 12-month change of -7.9% is at a level that has always preceded recessions.

Additionally, the Treasury yield curve continues to be significantly inverted, with short-term rates above long-term rates. This inversion is slightly less steep than at the beginning of May, but it is still close to the steepest it has been since at least 1981.

The lags involved with monetary policy changes are long and variable, suggesting it is difficult to determine when a recession will begin after these indicators turn negative. But they have been reliable guides in the past, and are likely to be correct in their signaling this time, too.

David Berson

Rx for Japanese Companies

Macro Strategy

TS Lombard
July 6: A longstanding issue with Japanese companies is the historically low return on equity. Over the past seven-and-a-half years, Japanese ROE has averaged 8.5%. Over the same period, the corresponding figure for the U.S. was 16.1%, the EA 10.2%, and the U.K., Canada, and Australia, around 12%. Until the low ROE issue is resolved, through-the-cycle returns for Japanese equities are likely to remain subpar.

The good news is that there does finally seem to be an effort under way to improve this state of affairs. In May, Hiromi Yamaji, the new Tokyo Stock Exchange CEO, issued a “name and shame” statement about TSE-listed companies with price/book ratios below one. The aim is to remedy this undervaluation. In order for that to happen, capital efficiency needs to be improved (asset turnover, return on capital employed, etc.), all of which would also boost ROE.

Andrea Cicione, Skylar Montgomery Koning

The Long-term Case for Tech

Market Navigator

Truist Advisory Services
July 5: The S&P 500 achieved its gains this year in an unusual way.

• The tech sector rose 43% in the first six months of the year, and just 10 stocks accounted for more than 78% of the
  S&P 500’s
  return. We have the most concentrated market in at least the past 40 years.

• Despite three Federal Reserve rate hikes, valuations for the S&P 500 have expanded to among the highest levels of the past 20 years, outside of the pandemic and tech bubble. That’s not what one would normally expect with the Fed still in tightening mode.

• This speaks a lot to the gains in tech. We expect tech to maintain a premium valuation given the need for companies to invest even if the economy slows, as expected, or risk being left behind.

Keith Lerner

Don’t Run from Real Estate

Economic Outlook

Pimco
The foundations of the global commercial real estate market are shifting. Since 2020, a confluence of factors—a dramatic shift in how buildings are used, the fastest surge in interest rates in more than 40 years, bank failures in the U.S. and Europe, and now a looming recession—has prompted price declines not seen since the global financial crisis 15 years ago. This upheaval will challenge rules of thumb and require a fresh approach to real estate underwriting.

Over the cyclical horizon, commercial real estate dynamics are likely to get worse before they brighten. For investors, this might seem daunting. But it also could be one of the best periods to deploy capital in decades.

In the near term, we see unprecedented potential in real estate debt. This includes new senior origination opportunities as lenders retreat, as well as distressed public and private debt. We foresee a tsunami of real estate loans maturing through 2025—including at least $1.5 trillion in the U.S., about 650 billion euros in Europe, and $177 billion in Asia-Pacific.

In addition to the target-rich opportunity set in debt, we believe in positioning portfolios for select equity investments in sectors with strong secular tailwinds, such as residential real estate, logistics, and data centers.

John Murray, Francois Trausch

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