Market Recap – US Labor Force Getting Stronger

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Market Digest – Week Ending 8/26

After reaching a new intraday high on Tuesday, the S&P 500 gradually fell over the course of the week. Softer economic data from Germany led foreign stocks lower, with gold and commodities also down. It was a fairly uneventful week from a news perspective, with most investors focused on Janet Yellen’s comments from Jackson Hole on Friday. While still leaving herself an exit, she indicated a rate hike is increasingly likely in coming months on continued strength in the labor market.

Weekly Returns:

S&P 500: 2,169 (-0.7%)
FTSE All-World ex-US: (-1.1%)
US 10 Year Treasury Yield: 1.63% (+0.05%)
Gold: $1,321 (-1.1%)
USD/EUR: $1.120 (+0.6%)

Major Events:

• Monday – The US national security regulator approved ChemChina’s $43 billion acquisition of Syngenta, although the deal still faces EU scrutiny.
• Tuesday – US new home sales increased in July to the highest level since 2007.
• Wednesday – German GDP slowed to 0.4% growth in the second quarter, due mainly to lower investment.
• Thursday – The IRS extended the 60-day rollover period for IRAs if one of eleven new exceptions is met, such as serious illness or a misplaced check.
• Thursday – US jobless claims fell for the third consecutive week, showing continued strength in the labor market.
• Friday – In Jackson Hole, Wyoming, comments from Fed Chairwoman Janet Yellen indicated a higher likelihood of a rate hike.

Our take:

Should you own stocks in the same sector you work in? In an increasingly popular trend, many investors are beginning to exclude such sectors from their portfolios. The logic goes as follows: you work at a technology company, so your job, salary and ability to save are dependent on said company. This means if the technology sector falls on hard times, your job could be at risk. And if this was the case, why would you invest in a bunch of technology stocks? You don’t need to lose your job and your investments. Seems reasonable, right?

Well, the logic is sound, but it’s not that simple. Sectors have become increasingly diverse. Just because the semiconductor industry goes through a downturn, it doesn’t mean a Google employee is at risk of losing their job. Likewise, an employee at Lockheed Martin isn’t necessarily at risk should demand for package delivery wane, yet both are in the same economic sector. So by placing blanket sector restrictions, investors could be leaving returns and possibly diversification benefits on the table.

It certainly makes sense not to load all your eggs in one basket. So if you work at Google, you probably don’t need to own excessive amounts of Google’s stock in your portfolio. But before you restrict an entire sector, ask yourself a few questions:
• Are most of the stocks in my sector highly correlated to one another?
• In a downturn, is there a high likelihood I could lose my job?
• If I lost my job, would it be difficult to find another quickly?
• Do I have upcoming cash flow needs from my portfolio?

If the answer to most of these questions is yes, then it might make sense to restrict an entire sector. But if not, you may just want to avoid loading up on your own company’s stock, or possibly a handful of stocks within a more focused area of the sector.

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
Brendan Erne, CFA

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