November Jobs Boom: Economy Creates Far More Positions Than Expected

November brought a jobs bonanza, with 228,000 new positions added and really high quality ones, at that. If anyone needed another sign that the economy is humming along, this could be it. Stocks ticked up in pre-market futures trading after the monthly payrolls report hit the wires.

It’s important not to look at just the overall number — which this time beat average Wall Street analyst estimates of 170,000 by nearly 60,000 positions. Investors need to dig into where those jobs were created, and this time, it’s mainly in categories that speak to real economic strength. Just consider some of the numbers: A 46,000-position rise in business and professional services, 31,000 new jobs in manufacturing, 30,000 in health care, and 24,000 in construction. These are job categories where people can often build careers.

Also, the report showed more people out there looking for work, another sign of a growing economy. The number of so-called “discouraged” workers who aren’t looking for work because they think no jobs are available fell by 122,000 from a year earlier, and the number of long-term unemployed is down significantly year-over-year. Still, labor force participation stayed flat at a relatively low 62.7%.

One sore spot, if you have to find one, could be on the wage side of the picture. Hourly earnings rose 0.2% to $22.24, barely a blip and slightly below the 0.3% rise analysts had predicted.

As it usually does, the Labor Department posted some revisions to prior reports. It took September employment up by 20,000 and revised October jobs down by 17,000. Combined, this had very little effect on jobs growth for those two months.

There’s nothing in this report that hints at any possible change in Fed policy. We’re looking at 100% chances of a rate hike next week, according to Fed funds futures. It’s not often that futures predict a 100% chance of anything, so maybe this is one to frame on the wall. As we pointed out earlier this week, futures prices even predict small odds of a 50-point rise in rates, though nothing from the Fed recently has hinted at possible surprises.

Stocks generally performed well on Thursday, with the Dow Jones Industrial Average ($DJI) getting a boost from General Electric (GE). That beaten-down name rallied in one of those good news/bad news-type of days, as the company announced major layoffs. Industrials led the sector board, rising nearly 1%. Other sector leaders included materials and info tech, which seems to be rebounding a bit from last week’s sell-off.

The one major exception in sector trade Thursday was consumer staple stocks, which fell nearly 1%. That was a change of pace for staples, which have led the market with nearly 7% gains over the last month. It’s possible that some profit taking emerged, or that the sector, along with other traditionally “defensive” ones like utilities, is starting to feel a chill from expectations of a Fed rate hike next week. Rising interest rates often put pressure on defensive stocks out of fear that higher yields from fixed income could compete with dividends for investor enthusiasm.

Over in the crude pit, U.S. futures made a bit of a comeback Thursday and early Friday after probing below $56 a barrel on Wednesday. Demand appears strong, judging from the latest U.S. supply figures, and reports of strong Chinese demand also surfaced. Additionally, there could be some technical factors at work, as front-month futures once again weren’t able to fall below $55. There appears to be some buying interest at those levels that could continue supporting the market unless supplies start building in a big way.

Until yesterday, it had looked like investors might have to worry about a possible government shutdown. Congress took care of that Thursday, voting to keep the funds flowing for another two weeks. So now the day of reckoning is Friday, Dec. 22, which means this could pop up again as a factor the week before Christmas. That raises chances of volatility around that time, though some analysts have pointed out that past government shutdowns didn’t have much long-term market impact. Past isn’t necessarily precedent, however.

One other factor worth watching: Copper futures prices rebounded a bit early Thursday but are down nearly 10% from their October highs. Some analysts see copper as a derivative of the broader economy due to its use in many industrial applications, especially electrical wiring. Based on that theory, the recent copper weakness could be a sign of slowing world demand for products made with copper, which might point toward slowing demand in general. It’s just a theory, but one that can’t be completely dismissed.

FIGURE 1: STAPLES COMING UNDONE? Consumer staples (candlestick chart) led all sectors over the last month but fell nearly 1% Thursday. This could be profit taking or a general weakness in so-called “defensive” stocks ahead of what’s expected to be a rate hike next week. Meanwhile, info tech (purple line) has bounced back this week after coming under pressure in late November. Data source: Standard & Poor’s. Chart source: The thinkorswim^® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Unwind Rewind

As next week’s Fed meeting draws near, one story being pushed into the background a little is the Fed’s balance sheet and what effect its unwinding might have not just on the front end of the rate curve but further back as well. Already, some consumers are feeling the pinch of higher fuel prices. The possibility of higher mortgage costs as the Fed continues unwinding could mean household balance sheets becoming constrained and a possible impact on consumer confidence down the road. This is conjecture for now, but bears watching amid what’s generally been a euphoric feeling in the markets.

Chinese Check

Loan rates in China recently reached multi-year highs. Although the official benchmark government loan rate has stood at 4.35% for two years, the average interest rates on loans to non-financial companies and on mortgages have both risen above 5%, The Wall Street Journal recently reported. Why should U.S. investors care? One school of thought says this is good news, because it means China’s government is allowing the free market to work. From a long-term standpoint, this could be promising because it could foretell a more competitive business environment where the government doesn’t have as much influence. U.S. companies that play in China might see this as a positive. On the other hand, higher rates have the potential to slow China’s economy. Many U.S. multinationals depend on Chinese business, and if China catches a cold, the U.S. might sneeze.

One dark horse is the weaker U.S. dollar, which could end up making U.S. products cheaper for Chinese customers. Check Q4 earnings and listen to the calls of some of the big agricultural, info tech, and industrial companies next month to see what sort of China syndrome they might be encountering.

FOMO

One phrase many millennials and younger people use is FOMO: Fear of Missing Out. This might explain why so many of them seem to constantly be checking their phones. They’re worried they might be missing something. There’s a touch of FOMO in the markets lately, too, perhaps best demonstrated by the crazy action in bitcoin, which climbed 40% in 40 hours to $19,000 before sliding back. It’s also arguably happening in stocks, where every recent dip seems to be met by a wave of buyers. We saw that most recently with the Nasdaq this week after last week’s sell-off.

People might be getting conditioned to stay in the market based on where it’s been, with the S&P 500 Index (SPX) up 19% over the last year and 85% over the last five years. While there’s no argument here against investing in stocks, it’s also important for investors to know why they’re getting in and to have goals. Just buying stocks because you’re afraid of missing a possible rally isn’t good enough. You need to do your homework, too, and have a sense of where you want to get in and get out. Don’t let FOMO lead you to poor decisions.