Why Markets Are Rallying After December Non-Farm Payroll Report

A day before the first major economic report for 2023, the S&P 500 (NYSEARCA:SPY) dropped sharply in the last hour of trade. Markets reacted nervously to the ADP jobs report showing 235,000 jobs added.

The monthly nonfarm payroll report exceeded expectations. However, job growth slowed, pleasing markets. Based on the job gains by sector, how should investors adjust their strategy for the rest of the year?

Lower Unemployment Rate

The U.S. BLS reported the unemployment rate fell to 3.5% in December. The rate is within a narrow range of 3.5% to 3.7% established in March 2022. In addition, the unemployment rate trended below 4% for a year.

The labor force participation rate was 62.3%, mostly unchanged since early 2022. Investors should infer that the participation and unemployment rates would not change by much from here. Despite persistent inflation and higher interest rates, the labor market dynamics will likely not change.

The stock market should welcome job market stability. The Federal Reserve has a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The December report suggests that the economy is at an optimal employment level.

Jobs in leisure and hospitality rose by 67,000. Markets already anticipated strong growth in the tourism industry. Both Marriott (MAR) and Hilton (HLT) stock trade an unfavorable valuation. The quant grade for the stocks is an F. In the airline sector, American Airlines (AAL) offers a better valuation and similar growth. However, its profitability is weaker than the hotel companies.

A revival in tourism is lifting growth prospects for cruise ship firm Royal Caribbean (RCL). RCL stock scores a B+ on growth.

Job Growth in Health Care

Healthcare employment increased by 55,000 in December. The increase in nursing and residential care facilities suggests that Medical Properties Trust (MPW), a REIT, is a buy. However, readers should consider the negative momentum, as shown below, and the short float of 15.9%. In addition, S&P Global Ratings put the REIT on a watch for a downgrade. It cited the firm’s exposure to Steward Health Care. Still, MPW stock has strong quant scores:

Drug stocks traded mixed recently. Walgreens Boots Alliance (WBA) fell after posting Q1/2023 results. The company issued a FY 2023 outlook above consensus. It raised its sales guidance for the year. It also increased its fiscal 2025 sales target in the range of $14.5 billion to $16 billion.

Construction Jobs Growth

The economy added 28,000 construction jobs, especially in the specialty trade contractors with another 17,000 jobs. Once again, markets anticipated strong construction activity. Caterpillar (CAT) stock traded in the $230 – $240 range since Nov. 2022. It rose again by almost 3% after the jobs report.

Deere (DE) stock appeared to peak at $440, despite trading at a price-to-earnings ratio similar to that of CAT stock.

Retail Trade Jobs

Employment in retail trade increased a little, up by 9,000. Amazon’s (AMZN) headcount reduction of over 18,000 employees suggests that consumer spending will weaken. After potentially lackluster holiday sales, retail demand might worsen. Inflation rates are slowing in 2023. It will probably still hurt disposable income levels, however.

The government posted a 4,000 jobs decline in couriers and messengers and 3,000 jobs drop in warehousing and storage. This is consistent with Amazon closing or pausing warehouses.

Consumers will continue to prioritize their budget on food, such as eggs and milk, over “nice to have” goods.

Costco (COST) remains an attractive holding. The company posted a 7% increase in December 2022 sales. Sales topped $23.80 billion.

Durable Goods Manufacturing

The economy added 24,000 jobs in durable goods. Defense, aerospace, and military contractors already announced major contracts with the government in December 2022. The government allocated $858 billion in the defense program out of the $1.7 trillion spending bill through September 2023.

At 52-week highs, Lockheed Martin (LMT), Raytheon (RTX), and Northrop Grumman (NOC) are attractive holdings.

Hourly Earnings Growth Stalled

The government reported the average hourly earnings on private nonfarm payrolls increased by only nine cents, up 0.3%. In the last 12 months, this increased by 4.6%.

The slower payroll growth might ease the pace of permanent inflation. This lowers the pressure on the Fed to raise rates aggressively.

Your Takeaway

Astute investors must assess the jobs data report just like the Fed. It suggests the economy is absorbing the higher interest rates without hurting workers.

The Central Bank will review the CPI report next week. It will not come close to the 2.0% inflation rate target. However, I think market bearishness will ease if/when the BLS reports a lower CPI figure.