Global Investment Strategy
May 26, 2015 (Weekly Update)
Tracie McMillion, CFA®, Head of Global Asset Allocation Strategy
Weekly market insights from the Global Investment Strategy team
- The U.S. unemployment rate has fallen to 5.4 percent from a recession high of 10 percent in 2009, and below the 5.8 percent long-term average.
- While U.S. unemployment rates have dropped for younger workers over the past few years, employment statistics show that the distribution of job gains has been uneven.
What it may mean for investors
- At this time, we suggest investors take overweight positions in U.S. large company stocks and Developed Market stocks.
Congratulations Graduates, Prospects for a Job Have Brightened
Graduation season is in full swing this month, prompting students (and their parents) to wonder what opportunities today’s job market has to offer newly-minted graduates. The U.S. job market as a whole has improved greatly over the past five-and-a-half years, with roughly two million net new jobs created and nearly five million current job openings. The U.S. unemployment rate has fallen to 5.4 percent from a recession high of 10 percent in 2009. That figure is below the 5.8 percent long-term average. Meanwhile, jobless claims are at levels that imply full employment.
All this should be good news for recent graduates. And while U.S. unemployment rates have dropped for younger workers over the past few years, employment statistics show that the distribution of job gains has been uneven. Certainly educational levels are inextricably linked to unemployment levels, but the age of the job seeker is also a factor—a trend we have observed not only here in the U.S., but abroad as well. Countries such as Japan, the UK, and the Eurozone, all have reported higher unemployment rates for younger workers over the past few years.
But digging a little deeper into the data, we notice a trend. As the chart below shows, U.S. unemployment rates drop dramatically as workers reach the ages in which their educational attainment is typically greater.
Chart 1: Unemployment Rates by Age
Source: Bureau of Labor and Statistics, April 2015
High unemployment rates among the youngest workers (between the ages 16 to 24) correspond to the relatively higher unemployment rates we see for labor participants with less than a high school diploma (8.6 percent) and high school graduates (5.4 percent). Workers who have attended some college or attained an associate degree are unemployed at a rate of 4.7 percent, and those with a college degree or higher are unemployed at a very low rate of just 2.7 percent. The key demographic for new college graduates to watch is probably the employment rate for the 25-to-29 year-old range which has been falling steadily since 2010 and is approaching a seven-year low of 5.8 percent. By the time workers have reached 30 years of age, the unemployment rate has dropped to what might be considered full employment levels or lower. But because the 30-plus age group has mixed educational levels, the unemployment rates across the spectrum of ages exceed those of college graduates.
Another survey that bodes well for new graduates is the JOLT survey (otherwise known as the Job Openings and Labor Turnover Survey). This survey shows that there are nearly five million open positions in the U.S. This is the largest number of openings in nearly 15 years, suggesting that the opportunities for flexible graduates are relatively abundant.
We look at the employment rates of younger workers not only at graduation time, but throughout the year, because young workers become the marginal buyers of goods and services in the economy. In other words, they add to (or subtract from) the consumption patterns that are already in place depending upon their ability and willingness to make purchases. Areas in which the increased demand may be especially impactful are in the auto and housing markets. We have seen sales of autos increasing steadily over the past few years, and recent housing data also appears to be improving. These gains are likely the result of better employment conditions broadly, but may also be largely related to improving employment prospects for younger workers.
The improvement in the U.S. labor market is a positive sign for economic activity and for equity investors of all ages. A greater proportion of young people in the workforce not only means that they can begin to plan for their future by investing in retirement and savings plans, but it also means that their parents may be able to make greater progress with their own financial goals. We would expect the firming employment market to be beneficial for asset prices in the months and years to come. We think demand for financial assets from the younger generation and their parents will increase as both continue to build their savings. At this time, we suggest that investors take overweight positions in U.S. large company stocks and Developed Market stocks. These assets are fairly valued, in our opinion, and may prove beneficial for workers who are investing for their retirement and eventual exit from the job market.
Tracie McMillion is the head of global asset allocation strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
In her current role, Ms. McMillion leads the development of global investment strategy. She oversees the creation of asset allocation recommendations and writes economic and market commentary and analysis. Ms. McMillion has been quoted in The Wall Street Journal and Barrons, on CNBC, and in other financial media outlets.
Ms. McMillion has more than 18 years of experience in financial services. Prior to her current role, she served as an asset allocation strategist and a senior investment research analyst for Wells Fargo and predecessor firms. Earlier in her career, she served as lead portfolio manager for Evergreen Private Asset Management where she managed assets for high-net-worth clients and philanthropic organizations.
Tracie earned a Bachelor of Arts in Economics and a Master of Business Administration from the College of William and Mary in Virginia. She is a CFA® charterholder and member of the CFA North Carolina Society. Ms. McMillion is located in Winston-Salem, North Carolina.
*As of Sept. 30, 2014
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