QQQ - Why February Jobs Report And SVB Financial A Lethal Dose For Stock Markets

2023-03-11 09:00:00 ET

Summary

• Markets rose and then sold off after the Jobs Report.
• Winning sectors and buys; sectors to avoid include information technology.
• Watch out for the Consumer Price Index Report next week.

When the U.S. Bureau of Labor Statistics posted job growth that was meaningfully below the ~ 500,000 increase expected, markets rallied temporarily in the morning. This proved a short-lived rally that repeated the trading pattern the day before. Hours after the jobs report, the Federal Deposit Insurance Corporation announced it would shut down Silicon Valley Bank ( SIVB ).

The seemingly separate incident from the jobs report is highly connected. The Federal Reserve will need to weigh in on the strong jobs report, its hawkish (tightening) interest rate policy, and its effect on regional banks.

Jobs Increased in February 2023

In February, the economy added 311,000 jobs as the unemployment rate edged up to 3.6%. The addition is an expected decline from January. It is also less than half the jobs added a year ago. Last year, the central bank did not raise interest rates as economic activity accelerated.

Job growth slowed considerably last March and April only to hover around the 300,000 level. Last month, jobs grew the most in leisure and hospitality, retail trade, government, and health care. Employment fell in the information, transportation, and warehousing industries.

Investors should not allocate their portfolio based on a month of job growth and decline by sector. Those who do should observe what consumers are willing to spend their declining disposable income on.

Leisure and Hospitality

The Covid lockdown created pent-up demand for travel, leisure, and hospitality. In the year-to-date period, Hilton Worldwide ( HLT ) gained 12.4%, beating the S&P 500's YTD return of just 0.91%. HLT stock trades at a premium, so its valuation score is an "F."

The hotel rewards investors with a growth and profitability grade of A+.

In the last quarter, it posted revenue growing by 33.1% Y/Y to $2.44 billion . It easily exceeded its high end of guidance with an adjusted EBITDA of $740 million in Q4.

Chief Executive Officer Chris Nassetta said that the industry faces the lowest levels of supply in years. It continues to be met with very strong demand. Customers are spending less but are traveling more. International markets are opening up, strengthening Hilton's business in Asia Pacific and Japan. Once China's travel volumes gain momentum, expect Hilton's second-half guidance to rise.

Retail trade

According to a google search, JD.com ( JD ), Alibaba ( BABA ), Home Depot ( HD ), CVS Health ( CVS ) and TJX Companies are firms in the retail trade sector . Investors should not consider China's e-commerce stocks at this time. The U.S. jobs report more directly affects local retail demand.

Last week, JD declared a strong 62-cent per share dividend and posted revenue of $42.8 billion . It earned 70 cents a share. JD stock fell by around 10% after the fairly good results. This is a bearish sign that took Alibaba down with it. Investors should not ignore the escalating trade war between the U.S. and China.

The U.S. is protecting its intellectual property by restricting chip exports. The Netherlands recently supported America's efforts .

Health Care

Healthcare added 19,000 jobs in hospitals and 14,000 jobs in nursing and residential care facilities. Investors should not rush out and buy the cheapest REIT with the highest yield. Medical Properties ( MPW ) gets a plethora of excellent coverage on this site. Its sudden slump from a support price of $12.00 to close at $8.79 is worrisome. MPW stock pays a dividend that yields 13.2%.

Income investors may raise their 5.0% to 5.4% minimum yield requirement to 6.0%. Even when assuming a Fed Funds rate of that range, investors should not buy Medical Properties for its yield double that of the Fed Fund's rate.

Sectors at Risk

Technology

Employment declines fell in the information industry, down by 25,000 jobs. In 2023, 480 tech industries cut 128,202 jobs, according to layoffs.fyi . Technology investors need to take a step back. Mega-cap firms like Meta Platforms ( META ) and Alphabet (GOOG) ( GOOGL ) hired too many staff during the pandemic. They assumed the stay-at-home trend would continue forever. CEOs projected a straight-line growth over several years.

GOOG Stock:

Above: Alphabet is highly profitable from its ad-sense business. The U.S. government ban on TikTok will reinvigorate YouTube's prospects. Government workers have 30 days to delete the app.

The Fed's rate hike almost immediately ended growth in tech. Companies delayed purchase orders. They shortened their contract durations and dollar size. Look out for companies like Cloudflare ( NET ) reporting slower growth. Customer demand from startups will hurt Cloudflare.

Weak billings at DocuSign ( DOCU ) is another example of a slowdown for firms that thrived during the pandemic.

Lower Transportation and Warehousing Jobs

Trucking firms like Knight-Swift Transportation ( KNX ) may break down from their uptrend. The company has strong profitability while growth and valuation are unfavorable:

META stock is similar to that of GOOG stock, though it edges ahead on profitability.

Meta will sustain improving profits as it slashes jobs in its "year of efficiency." It has the financial freedom to continue investing billions in its metaverse project.

SVB Financial Matters

The Silicon Valley Bank quant sell rating since July 2022 will reward short-sellers . Its failure matters. The Fed might glean past the regional bank's FDIC-mandated closure. This would pave the path to a 50 bps rate hike.

The Fed may also evaluate the risk of the bank's failure to other regional banks and its customers. It will not care that Roku ( ROKU ) held around 26% of its cash and equivalents at Silicon Valley Bank . The bigger takeaway is that most customers deposited funds at Bank of America ( BAC ) or CitiGroup ( C ).

What to Watch Next

Watch the CPI report next Tuesday. Together with the job report, the Fed will have the necessary data points to decide how much it will raise rates.

Investors may continue to buy money funds and bond exchange-rated funds. Here are its daily returns on March 10, 2023, sorted by yield:

The PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund ( ZROZ ) is the most compelling. It has plenty of upside returns this year when interest rates eventually fall in 2024. It rose by 4.84% when investors panicked and parked cash into bonds and gold. ZROZ stock is up 6.94% YTD.

For further details see: