Preparing to Buy REITs in next 5 months: 95% Stocks vs. 5% Cash
I've sold some European equities, in order to raise 5% cash for further buying of REITs or Tech in a few months' time.
Last Friday’s US Non-Farm Payrolls (NFP) was a bit of a wake-up call for me.
May NFP saw a 4-sigma beat to expectations, coming in at 272,000 vs. consensus expectations of 180,000. Most of the jobs were found in healthcare, travel and recreation and government.
Hourly wages came in hotter-than-expected, at 0.4% m-o-m and 4.1% y-o-y, vs. expectations of 0.3% and 3.9%.
In sharp contradiction to the above data from the Establishment Survey, the unemployment rate (taken from the Household Survey) rose to 4%, from 3.9%. This suggests a softer job market.
The increasing divergence in labour market health, as presented by the Establishment Survey vs. the Household Survey, is becoming disturbing to me.
How hot is the US labour market, really?
Mr Market usually sees the Establishment Survey as providing more accurate data than the Household Survey.
This is because the Establishment Survey is based on actual payrolls data from companies. The Household Survey is based on unverified answers from households.
However, the divergence between the two surveys is growing alarming. The chart below shows the cumulative jobs added since 2020.
While the Establishment Survey shows a steadily upward sloping curve, the Household Survey shows a flat curve. The differential has widened to a stunning 9 million jobs in total!
The problem now is — which survey shows a more accurate view of the US labour market?
“May’s jobs report presented contradictory views of the labor market, as we expected. The establishment survey shows robust gains in nonfarm payrolls — yet the unemployment rate rose to 4.0%. We believe the latter currently offers a closer approximation of reality than payrolls, as BLS’ model for estimating business births and deaths – which added 231,000 jobs to the nonfarm-payrolls print in May – is lagging the reality of surging establishment closures and falling business formation. We think the underlying pace of current job gains is likely less than 100,000 per month.”
Bloomberg Chief Economist Anna Wong
Problems in the next 5 months present a buying opportunity
Over the next 5 months, the 2 probable scenarios that are likely to happen, both suggest a high likelihood of a correction, and a buying opportunity for REITs or tech.
Scenario A: Higher for Longer
Strong jobs, strong inflation numbers persist. This makes it impossible for the Fed to cut rates. Markets grind lower in the absence of good news.
Scenario B: Weakening Growth
Weaker jobs may lift stocks at first. But at some point, weak growth will translate into weak earnings. Earnings disappointment leads to a market sell-off.
However, there is a third likely scenario, a Fed surprise, that would result in a rally.
Scenario C: A Fed Surprise
Regardless of growth or inflation data, the US Federal Reserve delivers a surprise rate cut before September.
This isn't as unlikely as it sounds. The ECB did exactly that last week.
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