Job Growth Tops 300,000 In Biggest Gains Since 2016, Even As Wage Rises Ease

Job growth rocketed higher in February, climbing by 313,000 and easily outpacing Wall Street analysts’ estimates for growth of around 200,000. Stocks jumped in pre-market trading as investors started to digest the massive payroll gains, which were focused in key industries like construction and manufacturing.

In what’s arguably the all-important pay category, average hourly wages rose 2.6% year-over-year last month, pulling back from the previous month’s 2.9% growth that had triggered fears of inflation and possible hawkish Fed moves. On a month-to-month basis, pay rose a scant four cents, or 0.1%, slightly below analysts’ expectations for 0.2% growth.

Breaking down the jobs growth a bit further, the headline figure of 313,000 was the most for any month since July 2016, and lot of it was focused in career-building professions. For instance, construction jobs grew by 61,000, professional and business services rose 50,000, and manufacturing added 31,000. If there was a sore spot in what’s generally bullish data, it was that retail jobs growth tied for second most at 50,000. These jobs don’t tend to be the highest-paying. On an interesting note, the government said that over the past four months, which usually see the bulk of holiday hiring and layoffs in retail, there was little net change in general merchandise or clothing stores.

Wages rising 2.6% looked to be in the sweet spot. They’re up enough to mean more money in peoples’ pockets that could help boost consumer spending, but not necessarily high enough to increase worries about inflation. In addition, the government upwardly revised job growth for both December and January, saying that after these revisions, job gains have averaged 242,000 over the last 3 months.

Basically, this jobs report had everything one could want, and argues against some peoples’ theories that the economy might be starting to slow. What could be interesting to watch is what effect, if any, the numbers might have on Fed funds futures, which try to forecast the chance of Fed rate hikes. The odds of a hike this month now stand at nearly 89%, according to the futures market, with more than a 70% chance of another hike by June. Chances for a fourth rate hike this year have now climbed above 30%.

Looking back at yesterday’s action, stocks appeared to get an afternoon boost from President Trump’s tariff announcement. As the White House had originally said, tariffs of 25% for steel and 10% for aluminum will take effect, and now we know they’ll start later this month. However, Canada and Mexico will be exempted, and the administration “has the ability to modify the order” for other countries, an administration spokesman told reporters.

That arguably sounds a bit less scary than the blanket pronouncement Trump made last week that helped push down the market, and it reflects a tactic we’ve seen him use on other issues, too. The president starts by making a big statement, and then later moves ahead with something more pragmatic. The exemption for Canada and Mexico also could end up being a negotiating tool going forward for the North American Free Trade Agreement (NAFTA). In effect, he seems to be telling Mexico and Canada, “I let you off the hook for now, but not forever.”

The market action on Thursday reversed from Wednesday, with the small-cap Russell 2000 (RUT) coming under pressure while larger-cap indices like the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) found some support. Still, it appeared few participants were willing to make big bets either down or up ahead of the jobs report. There’s still a clear memory of the turbulence that followed last month’s payrolls data, and the mood on Thursday seemed to be “risk-off,” so to speak.

Glancing at Thursday’s sector scorecard, nearly everything finished higher, even consumer staples — which had been beaten down a bit earlier in the week. It topped the leaderboard with a gain of nearly 1%, followed by utilities and health care. So it’s fair to say the more defensive sectors did best Thursday, but growth areas like financials, industrials, and info tech also performed well. Only energy missed out, hurt by falling crude prices that appeared linked at least partially to record U.S. oil production (See below).

In company news Thursday, WalMart Inc WMT shares got a nice lift, and it looked like some of that might have been inspired by news that the Arizona State Retirement System — the state’s largest pension fund — had boosted its holdings in the stock. The state is trying to do more socially responsible investing, and appeared to be inspired in part by WMT’s decision to share the windfall it got from the new tax law with its employees. There’s big money from state governments that are under political pressure to invest in responsible ways, and it’s a story we’re likely to hear more about. Not just regarding WMT, but other companies as well.

Another thing that kind of fell under the radar Thursday was two acquisitions by Nordstrom, Inc. JWN. The company bought retail technology companies BevyUp and MessageYes, and said in a press release that “the two deals are a part of the retailer's innovative approach to creating a seamless shopping experience for customers.”  These are two really important acquisitions for JWN that will help the company personalize shopping, so keep an eye on them. It’s an example of the digital transition going on in the retail space.

Aside from today’s payrolls report, news is a bit thin, but keep an eye out for speeches by two Fed officials. Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans are both scheduled to talk.

FIGURE 1: VIX EASES. After a month of choppiness, volatility seems to be settling down a bit. The VIX (charted here over the last three months), fell to its lowest level since Feb. 27 on Thursday. That doesn’t necessarily mean all the volatility is behind us, but VIX staying under 20 for a full day could be an important first step. Data source: CBOE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Big Forecast From Big Oil

In case you missed it, Exxon Mobil Corporation XOM Chairman and CEO Darren Woods delivered some strong statements this week about where he sees the company going. Specifically, if oil falls to an average of around $40 a barrel, Woods sees a 35% potential increase in earnings by 2025, compared to a gain of about 135% if oil remains around the current $60 price, Barron’s reported. Woods also projected rising capital expenditures and return on capital employed over the next few years. It’s hard to remember a CEO of a Dow-30 company being this aggressive talking about the future, and it might be a bit of a byproduct of the tax benefits the company got from the new tax legislation.

XOM made most if its forecasts based on the idea that crude would remain around $60, basically where it is now. Though oil prices have doubled in the last two years, the commodity hasn’t shown much ability to push far above $60, in part because U.S. production is now above 10 million barrels a day. The supply picture only looks more bearish ahead, if industry experts turn out to be right. Many expect the U.S. to add an additional two million barrels to daily production before the decade’s end, possibly becoming a net-exporter in the process. U.S. production is now at record levels, exceeding the old highs posted nearly 50 years ago.

“Happy” Anniversary

Today marks the ninth anniversary of the bear market closing low posted March 9, 2009. At that point, the SPX sank to a 12-year low close below 680, and the $DJI closed at 6,547. An analyst quoted by CNN that day said “the path of least resistance is down” but that if good news hit, “you could see a big rally.” The problem, another analyst said in the same article, is that investors kept selling every time good news hit, despite fair valuations. Another issue was that people were sitting on the sidelines, afraid of more losses.

If there’s a lesson, it’s that investors should consider taking a long-term view and not letting themselves get overwhelmed by fear. Anyone who stayed on the sidelines back then risked missing out on the current rally. While there’s no guarantee the bull market can continue from here, remember that old age doesn’t tend to kill a rally. But fear can.

End of Quarter Tactic

Being overly fearful is never a good thing, but neither is being too sanguine. Though age doesn’t tend to kill rallies, rising interest rates and their potential impact on economic growth can’t be ignored, either. That’s one reason why investors should consider looking at their portfolios and making sure they’re in proper balance. The approaching end of the quarter can be a good time to conduct this exercise, as well as to consider potential sector behavior based on where the market might be in its current cycle. One school of thought maintains that when interest rates start rising (as they are now), the financial sector often outperforms because bank stocks tend to benefit from rising rates. Additionally, energy and materials can outperform because the economy tends to generate a lot of growth at these times.

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