The Boston Company's Dave Daglio says wage growth and sign-up bonuses demonstrate the genuine nature of the US bull market and will deliver an attractive environment for actively managed funds in the sector.
Sign-up bonuses for truck drivers in Detroit, Michigan, of between US$10,000 and US$20,000, alongside an increase in people quitting their jobs, show the trickle-down effect of the US recovery, according to The Boston Company's David A. Daglio, CFA.
Daglio, senior managing director and lead portfolio manager of the US Opportunities Fund, notes that Federal Reserve Chair Janet Yellen pays close attention to the Employment Cost Index, or ECI, which tracks wage growth. According to the most recent data from the US Labour Department, compensation costs rose 2.2% over the 12-month period ended December 2014, but Daglio notes that this reading is not illustrative of the larger picture. Instead, he watches the National Federation of Independent Business's Small Business Optimism Index, which surveys the intentions of smaller businesses in relation to worker compensation over the next six months. This metric, says Daglio, indicates that the ECI could be poised to rise more than 3% in the coming months.
"Why do you think small business owners are preparing to give wage increases? Is it because they are philanthropic? No, it is because they are struggling to find the right candidates and are offering more to try and attract them," he explains. "When we talk to trucking companies, they say the same thing: Their number one problem is finding attractive candidates. Even in lower-skilled jobs, like mass-merchandise retail, some of the largest US employers are raising wages."
Daglio says softer data in the US Northeast have started to spark worries that the US economy is nearing its plateau.
But he argues that it is too simplistic to judge the country by the merits of one region. Rather, he views the US as four distinct areas: the Northeast (which he compares to France or Japan), California (which could be described as the world's fastest-growing economy), the South, and lastly the manufacturing hub, which includes states such as Ohio, Michigan and North Dakota.
"The manufacturing hub is most like an emerging market; on a productivity basis, wages are not dissimilar to Eastern China. Companies had been outsourcing to Detroit rather than India, and as such, job numbers had stayed strong. Dollar strength is now making it a little harder.
"The US dollar has performed well because people are chasing strength, but it probably has to revert a little bit now. I think this will happen as we see some economic surprises from other regions in the world, such as Europe."
The negative impact of a stronger dollar will mainly affect large caps because they tend to make a greater proportion of their earnings overseas, according to Daglio. They are also the companies that benefited the most from a weaker dollar. Meanwhile, smaller companies are having a good earnings season, he notes.
"I think there could be weaker earnings growth now, and we could even see lower earnings from the S&P 500 as a whole this year compared with last year. But that is what makes certain areas even more compelling. For example, some small, regional banks have worked through the pain and are lending again, and they look strong."
Daglio also thinks certain companies in the technology sector are attractive based on valuations and a previous lack of tech spending by companies, which has resulted in pent-up enterprise demand. Additionally, once wage increases start to come through, he predicts consumers will spend more on tech.
"In this type of environment, not everybody wins, but that's when the case for active management is most compelling."
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