IEF - What To Do After July's Job Report

2023-08-04 13:15:03 ET

Summary

• Unemployment remains at 3.5% with slight revisions to previous NFP numbers.
• Employment increased by 187,000 in July, led by healthcare, social assistance, financial activities, and wholesale trade.
• The S&P 500 holds at the 4,500 range, with a focus on technology companies and job growth in healthcare.

Investors have three key data points that stand out in the U.S. Bureau of Labor Statistics nonfarm payroll employment report. First, the BLS reported unemployment little changed at 3.5%. Second, it revised its May NFP down by 25,000, from 306,000 to 281,000. Third, the BLS revised June NFP employment down by 24,000, from 209,000 to 185,000.

Fortunately, the May revision does not change my buying ideas . June’s data will not weigh on the Fed’s rate hike policy. After the Fed raised rates on July 26, as widely expected , what's the impact of the latest NFP report on the central bank’s policy? Will the S&P 500 ( SPY ) bounce higher from the 4,500 or break below it? What sectors should investors consider after the job count changes?

Payrolls Increased in July 2023

Employment increased by 187,000, led by healthcare, social assistance, financial activities, and wholesale trade. The unemployment rate of 3.5% is in the 3.4% to 3.7% range, established in March 2022 (as shown in Table A-1 ). In the 20-year view shown below, unemployment appears as low as possible at levels not seen since 2019:

Labor force participation continues to climb. As it approaches pre-pandemic levels, its increase will have a positive impact on the overall economy. People who work have disposable income, which increases the demand for goods and services. The Federal Reserve will raise rates again this year without hurting the labor market. After the 25 bps hike, it may comfortably leave rates higher for longer.

The higher rates come at a cost. Fitch downgraded the US long-term rating this week . The rating agency cited, among other things, its expected fiscal deterioration and growing debt burden. It will need higher taxes, through more income tax, to cover higher fiscal expenses related to the Inflation Reduction Act.

The cost to service debt from treasury sales will rise due to the higher interest rates. Readers should note that Brazil’s central bank began its rate-cutting cycle. It cut its benchmark interest rate by 50 basis points . Brazil cut its Selic policy rate to 13.25%. Only 10 out of the 46 economists that Reuters surveyed predicted the size of this rate cut.

In China, the post-COVID re-opening rebound stalled severely. Last month China’s central bank rolled over its medium-term policy loan rate . Markets expect the country to unload an aggressive stimulus to support its slow growth. Although investors earned triple-digit percentage gains from China technology stocks recently, the country faces an economic crisis.

Readers should ask if China is precariously sliding into a lost decade . The US dollar’s strength against the Yuan ( USD:CNY ) benefits the U.S. Although US imports of China goods are falling, the strong USD decreases costs. This helps tame inflation.

S&P 500 Holds 4,500 Range

After the NFP report, the S&P 500 bounced back at around 10 a.m. Weaker hardware sales from Apple ( AAPL ) are offsetting Amazon’s ( AMZN ) 10.8% rally. Today, the index depends more on the magnificent seven technology companies. Jobs in information was little changed for the month. In addition, employment hardly changed in mining, quarrying, oil and gas extraction, manufacturing, retail trade, transportation, warehousing, and government.

In the near term, the demand for jobs in those sectors is at equilibrium. After five-figure job cuts among many firms in the tech sector, employment levels match the desired output.

Value investors may shun AMZN stock for its price-to-earnings ratio. Apple’s 31.6x P/E looks expensive. However, these are two big firms that will find ways to expand their profit margins. They will thrive more in the hot economy and survive best if the economy weakens.

Job Growth in Healthcare

The economy added 63,000 jobs, sharply higher than the 51,000 average gain in the last year. Per the BLS report, ambulatory healthcare services (+35,000), hospitals (+16,000), and nursing and residential care facilities (+12,000). Income seekers should not panic buy an REIT like Medical Properties Trust ( MPW ). MPW stock bottomed below $8 in April but short-sellers still hold a 21.16% short interest.

High interest rates generally pressure REIT returns. However, consider big firms like W.P. Carey ( WPC ), Simon Property ( SPG ), and Realty Income ( O ).

Drug companies will have mixed upside from here. Be wary of drug firms that thrived during the COVID pandemic. Pfizer ( PFE ), which partnered with BioNTech ( BNTX ) to develop the COVID vaccine, is at risk of breaking below $35.

Moderna ( MRNA ) traded above $200 in the last year when investors thought that vaccine sales would increase. Instead, the firm posted a 94% drop in product sales . The firm still has $4 billion from previously announced Advance Purchase Agreements. As the flu season approaches, vaccine sales could add billions more in revenue. Moderna ended the quarter with $3.8 billion in cash and equivalents. It continues to develop other vaccines on its mRNA platform.

Jobs Increase in Financial Activities

The economy added 19,000 in employment in financial activities. This segment includes finance and insurance, along with real estate and rental and leasing. Bearish investors fret about the impending crisis for Commercial Real Estate (“CRE”). Regional banks have over half of their loans in CRE.

Investors believe that the market is pricing in such CRE risks. Regional banks like KeyCorp ( KEY ), PNC Financial ( PNC ), and Bank of California ( BANC ) rebounded from their March 2023 lows. Bank of California bought PacWest ( PACW ) in an all-stock deal . The combined firm will have around $36 billion in assets, further stabilizing the firm and the sector.

Investors are cautious about the rising costs for insurance firms. Year-to-date, Allstate ( ALL ) is still down nearly 20%.

Chubb ( CB ) stands out with a strong buy rating while Seeking Alpha’s quant rating for Hartford ( HIG ) and Prudential ( PRU ) is a hold.

Your Takeaway

Investors should not be complacent about the small changes in the NFP report. The Fed studies the data closely. It also analyzes the CPI data critically. The low unemployment will keep interest rates at elevated levels. This further encourages investors to hold a mix of treasuries like the 10-year ( IEF ) and 30-year ( TLT ), money market funds, and equity ETFs.

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