June 7, 2010 / 10:34 PM / in 7 years

Weak labor market shadows investors

<p>Barry Ritholtz, CEO and director of equity research at Fusion I.Q., speaks at the Reuters Investment Outlook Summit in New York June 7, 2010. Economic growth in the United States is "lumpy," but the chance of a double-dip recession is low and the U.S. dollar remains a better alternative than the euro, according to Ritholtz. REUTERS/Brendan McDermid</p>

NEW YORK (Reuters) - Risks are low that the U.S. economy will slip back into recession, but a weak employment outlook has cast a cloud that is keeping some of Wall Street’s top strategists conservative in their investment outlooks.

Potential contagion from European’s widening sovereign debt problem poses another risk, according to strategists at the Reuters Investment Outlook Summit in New York on Monday.

Barry Ritholz, director of equity research at Fusion IQ, said economic growth this year would be modest -- and his investment stance reflects that.

“We see an ongoing recovery, not necessarily one that’s going to be very strong,” Ritholz said. “There’s no doubt that growth is lumpy.”

After timing the recent stock market plunge nicely by going to 100 percent cash in early May from 69 percent cash, Ritholz’s firm is putting its toes back in the water.

“Two weeks ago we got back in, in a limited fashion” and are now 70 percent to 75 percent cash, he said.

Friday, the monthly U.S. employment report showed just 41,000 private sector jobs were created in May, down from 218,000 in April and far short of expectations.

“Everything hinges on employment,” said Richard Bernstein, chief executive of Richard Bernstein Capital Management LLC.

Bernstein said he was worried that the early-2010 improvement in the employment sector may have stalled, contributing to the U.S. equity market’s recent sell-off.

The S&P 500 stock index closed on Monday at 1,050 points, down 13.7 percent from its April 23 closing high for 2010 and firmly in correction territory.

Bernstein places more weight on weekly jobless claims than the monthly payrolls report.

Claims by those filing for jobless benefits had been trending lower earlier in the year, but remain stubbornly high -- 453,000 in the latest reporting week.

Bernstein remained upbeat, though. If leading indicators of employment improve, double-digit stock market returns -- perhaps in the 10 percent to 15 percent range -- are still possible, he said.

And Ritholz, of Fusion IQ, said three elements within the May jobs report -- temporary help, hours worked and income -- all told a more positive story than the headline.

Among Fusion IQ’s current holdings are retailer BJ’s Wholesale Club and “a few” technology names, including Tellabs. Some airline stocks also look attractive at this point given shrinkage in many companies’ fleets.

“People don’t realize how much the airlines have reduced capacity ... there’s no more of these empty planes flying around the country,” Ritholz said.

Most strategists said price risks for the United States are skewed to deflation, not inflation, and that the Federal Reserve will be in no hurry to raise benchmark interest rates in 2010.

“At some point the Fed has to do something, but it looks like policy needs to be extremely accommodative for a long period of time,” said Greg Peters, global head of fixed income and economic research with Morgan Stanley. Rates could stay near zero until late 2011, he said.

Peters said he worries about the contagion effect of Europe’s debt crisis on global markets and growth.

“Really, what I worry about most is the sovereign debt crisis becoming a rolling crisis and hitting the shores of the UK and the United States,” Peters said.

Frequent market bear Robert Prechter, president of Elliott Wave International, was characteristically downbeat.

“I‘m quite convinced we have resumed the bear market,” Prechter said. “We have a long bear market ahead in stocks, which are still way overpriced, and have very little resilience in the overall economy to withstand the pressures that probably lie ahead.”

Prechter said deflation is “inevitable” in the U.S. economy and that “cash is king” in his investment view.

“We’ve had unlimited credit offered by the Fed but the CPI is still near zero. Even low-priced retailers are lowering prices still more, and people are having a hard time finding jobs,” he said. “Stay as safe as possible. Money is what you want until the storm blows over.”

Editing by Leslie Adler

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