America Inc. is hiring again and in earnest, or at least so it seemed until last Friday, when June's weaker than expected payrolls data reminded everyone that three months does not a trend make.

The disappointing employment figures came after a number of weaker than expected economic reports confirming how mixed the economic data has become over the last month or so. Friday's jobs numbers were also followed by reports showing that auto and chain store sales were also much softer than previously expected for June.

The US Federal Reserve may have begun its tightening cycle last Wednesday, raising interest rates 25 basis points, but the bond prices soared on the weaker than expected data nonetheless, suggesting that far too much pessimism about inflation may have been priced into the bond market.

With the yield falling 28 basis points, the benchmark ten-year Treasury note posted its biggest weekly gain since January, as speculation of another rise of 50 basis points in August essentially evaporated. The futures market is now only pricing in a 10 percent chance of that occurring. While bonds rallied, the opposite was true for the US stock market, which ended the week down almost one percent.

The S&P 500 is up a mere 1.2 percent so far this year, a long way away from the expected annual return of 12 percent by perennial bulls like Goldman Sach's chief investment strategist, Abby Joseph Cohen.

Wary investors are still clearly worried that the economy may now be slowing down again. The US dollar also fell as a result.

This is hardly good news for the embattled Bush administration. The president has been on the back foot over his handling of the domestic economy for some time and is facing a very close election in November. Ironically, many of Mr. Bush's initiatives to spur growth run counter to the commonly held conservative ideals of small government and free trade, although the soaring $500 billion budget deficit has raised criticism from both sides of the aisle.

Partisan debate over how much the president's policies actually contributed to the economic recovery however, are likely to continue long after the elections are over.

If politics is an uncertain business, economics is an uncertain science. When the US economy was booming and equity valuations were going through the stratosphere, some economists were expounding theories of a "new economic paradigm".

We were told that the business cycle was dead and that the good times were here to stay, indefinitely, which was quite clearly nonsense ? then and now ? unless of course if you happen to be fortunate enough to be in the construction or real estate businesses here in Bermuda.

When the US bubble economy finally burst, some were then predicting that it would take a generation for the markets to recover. It seems therefore woefully premature, at this stage, to begin to read too much into the recent spotty economic data.

While there are a number of imbalances to be concerned about, the US economy is still quite firmly on track to post a year of above trend GDP growth. Excess capacity is still being absorbed, so deflationary pressures are continuing to recede, which means that US interest rates should still rise to two percent by the end of the year.

One should not mistake this rally in the bond market for anything but a correction in a secular bear market. The trend in bond yields is still higher, not lower.

For investors, stocks are therefore still the better bet, even if economic growth may already have peaked and the outlook is that earnings may be poised to slow later in the year. For one thing, while corporate America may be hiring again, actual wage growth remains anaemic.

This underscores a determination to keep labour costs, which makes up about 75 percent of total production expenses, in check. Obviously, the prospect of higher interest rates has to be a vital consideration in terms of one's equity strategy.

Small cap stocks look most vulnerable here, while any slow down in growth is likely to hit the very large cap companies harder given that the return on invested capital starts to decline as the demand slows.

Asset allocation is therefore crucial, even in these listless markets. At the same time, one has to appreciate that investment returns are also likely to be more modest. The easy money was made last year.

Kees van Beelen is a portfolio manager with the Bank of Bermuda, a member of the HSBC group. The opinions expressed here are his own and not necessarily the Bank's.