When Good News is Bad

The latest jobs report showed a burst of hiring in February that underscored the resilience and confidence of U.S. businesses that are adding workers at the fastest pace in 17 years. US employers added 295,000 jobs, the 12th-straight monthly gain of more than 200,000, the government said this past Friday. But despite this seemingly good news story, US stocks clocked in their worst trading day in two months last Friday, while Treasury bond prices tumbled and the US dollar hit an 11-year high. The robust US employment report played to expectations that the Federal Reserve could raise interest rates sooner than markets had expected.

This strong stretch of job creation, the best in nearly two decades, pushed the US unemployment rate into the Federal Reserve’s target zone, keeping the central bank on track to raise interest rates as early as June and jolting investors worried about higher borrowing costs and slimmer corporate profits.

The latest improvement put the jobless rate at the top of the 5.2% to 5.5% range that may Fed policy makers consider to be full employment, or the rate the economy can sustain without stoking too much inflation. It sets the stage for central bankers, at their meeting this month, to drop an assurance they will be patient before lifting rates from near zero.

After the report was released the dollar surged in one of its best days in years, climbing against the euro and yen. The greenback’s strength comes against the backdrop of a brightening domestic outlook and dimmer performance in the Eurozone, Japan, China and other parts of the world.

The rout in emerging market currencies accelerated after Friday’s better than expected US jobs report, reigniting fears that emerging market currencies could see a repeat of 2013’s “taper tantrum,” when the Fed first announced it would start phasing out its bond buying program. The prospect of a sudden increase in US interest rates heralded a reversal of the tide of ample liquidity that has flowed into developing countries in the past couple of years, prompting investors to shun emerging markets.

The Turkish lira and Mexican peso, two of the most actively traded emerging market currencies, tumbled more than 1 percent on Friday to new record lows of 2.63 and 15.4 against the US dollar.

The Brazilian real, is now trading at a ten and a half-year low to the US dollar, while the Indonesian rupiah was trading at levels last seen in 1998 and the Colombian peso hovered near a six-year low. Meanwhile the South African rand, fell 1.9 percent in the last few days to 12.06 per dollar and is approaching its 2001 low of 12.44

Emerging markets are also facing the added challenges of weaker global growth and sharply lower commodity prices, which have opened up budget gaps and rattled economies from Brazil to and Nigeria.

I expect the market volatility that we’ve been experiencing lately to accelerate as the Fed begins to slowly move toward gradual tightening—further emphasizing the vastly differing fortunes between the developed and developing worlds.

I still think that the US offers the best long-term opportunities for investors given the undeniably positive economic data that stands in stark contrast with that of every other major economy. But there are great short-term opportunities emerging out of Japan and Europe, where the central banks in those two regions are just in their early stages quantitative easing (QE). While the merits of the QE may be debatable, the US experience has taught us that the almost certain outcome from a massive QE program is higher asset prices.

For investors looking to stay closer to home, the health care sector, particularly the biotech subsector screens well. The sector has the fastest revenue and earnings growth of any sector, while also having one of the lowest PEG ratios. This coupled with the fact that this sector has seen the strongest positive revisions to analysts’ expectations over the past six months.