The insufficient job creation, stagnant earnings and alarming long-term unemployment highlighted by May’s disheartening jobs report underscore America’s persistent unemployment crisis. The numbers also speak to a synchronized slowdown that is now taking hold of the global economy — a phenomenon that is being signaled by virtually every other data release out of Europe, the U.S. and emerging countries.
The realization of lower global growth, together with increasing financial instability in some parts of the world (particularly Europe), is an important driver of the recent sharp sell-off in equities and other risk assets. It has also turbocharged the collapse in yields on higher-quality government bonds, with the 10-year U.S. bond at a record close of 1.46% on Friday (and Germany even lower).
To state the blatantly obvious, the best investor positioning for the last few weeks was an across-the-board defensive, “up in quality” one. The much more difficult (and urgently relevant) question on many people’s minds today is whether this still makes sense — particularly in view of the dramatic valuation moves.
Already, several analysts have come out recommending that investors react to the recent sell-off by significantly adding risk assets to their portfolios now. And those who favor this "mean reversion" approach, a theory that assumes highs and lows are temporary and that prices will eventually move back toward the mean or average, cite historical levels to support their recommendation. They see enticingly cheap price-to-earnings ratios for stocks to unsustainable low yields for government bonds.
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