Nonfarm Payrolls -what it means

Today’s Employment Report & Markets
February 7, 2014

Today’s jobs report delivers neither encouragement nor discouragement. It falls right smack in the middle of a slow recovery trend with relatively flat labor income. Do not get excited about it. Do not panic, either. The debate over whether or not to extend unemployment benefits is likewise not really relevant for the market posture. It may encourage job growth as some economist suggest since it raises the incentive to work. The debate over weather-related effects is not of much consequence.

Simply put, a slow-growing trend is the best thing for stock markets in the US. It means the Fed proceeds slowly with tapering and the politics are calmer in an election year. It means the US inflation rate stays very low and interest rates do as well.

The story is dramatically different regarding emerging markets. Without robust growth in the US and other mature developed economies, those markets remain problematic. Three factors – (1) the rollout of foreign central bank-induced rising interest rates, (2) foreign exchange currency turmoil, and (3) emerging-market growth-rate questions – are contributing to a continuing saga of uncertainty and trouble. We keep an eye on the overflow of Turkey’s debt issues and higher Turkish interest rates as those issues impact banks in Europe. We keep an eye on Asia and especially on the Negara Bank in Malaysia. We look at Brazil and question the rate of recovery in economic growth.

To us, contagion risk seems to be rising in the world. Risk assessment is not an outcome forecast. It is a cautionary warning. The world may get a shock, or it may work its way through the contagion risk without one. We do not know.

Contagion risk may even reach the US when it comes to the issue of Puerto Rico debt. We will have more to say about Puerto Rico next week. For today, the downgrade of PR by Moody’s is enough commentary.

Meanwhile, Cumberland Advisors is maintaining a cash reserve in both its US and international exchange-traded funds (ETF) accounts. We are not fully invested; however, that could change at any time. The 6-7% market correction may be enough to afford some opportunity. The global risk profile (including PR risk) says do not go all in today.

David R. Kotok, Chairman and Chief Investment Officer

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