Slower-than-forecast growth in employment means labor costs won’t be a threat to corporate profits, according to Neel Kashkari, head of global equities at Pacific Investment Management Co.
“Corporate taxes are not going to go up, cost of labor is going to stay low,” he said in an interview on Bloomberg Television’s “Market Makers” program today. “Corporate profits can continue to stay strong in the short term.”
Labor Department figures today showed the U.S. added 80,000 jobs in June, trailing the median economist projection of 100,000. Average hourly earnings increased 0.3 percent from the previous month. Analyst forecasts compiled by Bloomberg project that while earnings fell 1.8 percent for Standard & Poor’s 500 Index companies in the second quarter, profits will still increase 7.2 percent for the full year.
While a slowdown in the economic recovery may affect earnings in the longer-term, Kashkari said Pimco is not forecasting a U.S. or global recession.
“We are just forecasting slow growth,” said Kashkari, a former assistant Treasury secretary who was the first administrator of the $700 billion Troubled Asset Relief Program
Pimco is being very selective when it comes to which stocks to buy and is focusing on companies that should be more resilient in the face of a global economic slowdown, Kashkari said. He cited companies such as Wal-Mart Stores Inc., the world’s largest retailer, low-fare carrier Spirit Airlines Inc. and drugmaker Merck & Co.
“There are individual names that should do well in this environment,” he said. The Newport Beach, California-based firm’s Pimco Total Return Fund is the world’s largest mutual fund.
The risk of economic shocks from Europe’s debt crisis and slowing growth in China create a flight to high-quality global companies, Kashkari said. Investors should stop holding cash and come back to the market before inflation accelerates as a result of central bank policies meant to stimulate growth, he said.
“Investors are waiting on volatility, but earnings will decay as prices around the economy rise,” he said. “Sitting in cash is not a good option.”
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