Wall Street Nervously Waits for the Jobs Report

The upcoming jobs report preoccupied Wall Street on Thursday amid hopes that the increase will be moderate, and dissuade the Federal Reserve from persisting with its aggressive interest rate hikes aimed at curbing inflation.

The market has suffered a couple of down weeks as it braced for even more onerous Fed rate boosts. The S&P 500 on Thursday overcame losses to finish up 0.3%. The jobs report for August comes out Friday morning. .

There’s some evidence out this week of a softening economy, which could ease the Fed’s hawkish policy. U.S. private payrolls in August rose at half the previous month’s pace, according to the ADP survey. Also, the latest ISM manufacturing survey found that prices dipped in August to the lowest point since June 2020.

“Soft survey data supports the thesis that inflation is likely past peak,” said Jeffrey Roach, chief economist for LPL Financial, in a note. “Then, the Fed will likely be pleased as this report points to activity that is neither too hot nor too cold.”

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The July jobs report was an eye-popping 528,000 gain, far above projections. That helped fuel the Fed’s desire to tighten policy and thereby slow economic growth—and inflation.

August payroll forecasts are for a 298,000 gain, and for the unemployment rate to stay at 3.5%, one of the lowest levels in the past 50 years. Robust wage growth is also anticipated amid strong demand for labor.

Obviously, another job-creation blowout would energize the Fed to crank up rates more rapidly than Wall Street would like.

Whatever happens with the jobs report, Mark Haefele, CIO at UBS Global Wealth Management, has said he thinks it’s clear that a bumpy road lies ahead for investors. “With rates likely to stay higher for longer, our base case is for further volatility, earnings downgrades and higher-than-expected default rates over the course of next year,” he wrote in a note.

Rebalancing needs to get rebalanced itself. So says a recent commentary from JPMorgan Asset Management. Trouble is, asset allocators rejigger their portfolios too often, according to JPM’s head of institutional strategy, Jared Gross.

Monthly or quarterly rebalancing is doing nothing to improve performance, he said. What’s better, he explained, is to replace 10% or more of a portfolio every year, using flexible strategic assessments.

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An annual reallocation fares better through time, compared with monthly or quarterly re-dos, JPM data indicate, using a 60/40 stock-bond breakdown. “Raising the bar for rebalancing – even in volatile markets – may raise returns over the long run,” Gross contended.

He went on to state the ideal: “Well-diversified private strategies reallocate capital internally across assets, sectors, and geographies to take advantage of market swings to improve long-term performance.”

The shorter-term reallocations fall short, he said, because “they are hard to reconcile with the longer-term trends of financial markets.”

Reason: “Frequent sharp reversals over short time horizons are not the norm, yet mechanical rebalancing strategies are constructed around capturing just such movements.” The average bear market has lasted 22 months, while the average bull market has lasted 56 months, he noted.

The best rebalancing opportunity is when two asset classes move at the same time in opposite directions, he said. Sometimes stocks will move one way, but bonds won’t make much of a move. Rather than shuttle between the two, some investors maintain a large reserve of cash to buy in one direction or the other.

The problem with that, Gross wrote, is that “the return drag that it would create over longer horizons would likely outweigh the benefits.”

Using alternative assets in rebalancing is often not a good idea, as they are best kept aside for liquidity needs and for long-term appreciation, he said. “It makes little sense to withdraw capital from private strategies that are built around carefully constructed portfolios of illiquid assets that accumulate value over long time horizons,” Gross declared. “Selling these strategies in reaction to volatility in public markets short-circuits this process.”

More thought is required in rebalancing than many investors employ, he indicated. Wrote Gross, “Mechanical rebalancing is no substitute for a thoughtful process that incorporates the latest macroeconomic and market data alongside a rigorous asset allocation model.”