Challenger and Gray and ADP both issued reports on employment which showed slower gains in new payrolls than had generally been expected and the highest level of layoffs since February. While the ADP data has been subject to significant revisions in past months, the data nevertheless does confirm that the economic growth has been tapering. This, of course, should be entirely as expected given slower GDP growth but given concerns about credit problems, the data may provide fodder for those that are more bearish or expect something more severe like a recession. While the big reports on unemployment are due later this week, what has been reported already is consistent with our thinking. The economy is slowing. Digging deeper into the employment stats reveals that financials experienced the greatest loss in jobs while manufacturing also had softer gains. Whether or not this latter figure is somewhat seasonal in nature, we are not yet sure. But, the financial weakness should be expected, especially since it is concentrated within financials in the mortgage area. The same thing happened in 2001 with technology companies. Overall, we think the data continues to support a Fed that can cut rates. Inflation is not a problem and the economy is weakening. We believe we're in the sweet spot of what will work well in such an environment; companies that can generate strong relative growth in spite of the weakening economy. While a Fed cut would certainly drive multiple expansion, it may not be necessary to guarantee relative outperformance of the companies we invest in. At the beginning of the year, in our update
Good Times for Growth Stocks, we stated why we believed Growth Investing would finally outperform. Based on year to date numbers for the Russell Style indices, that is exactly what is happening, both for the markets and our portfolios. Growth investors have endured a long time wandering in the desert, an experience which though painful at times, is entirely typical and will only make us stronger. The value guys endured a similar drought in the late 90's.