Does the Jobs Report Foreshadow a Year-End Rally?

The U.S. Bureau of Labor Statistics reported a total of 266,000 new jobs created in November. This was nearly 50% higher than the forecast for 180,000 new jobs by economists who were surveyed by Refinitiv. Both the September and October jobs reports received upward revisions to the tune of 41,000 total new jobs. Some of that increase can be explained by the recall of thousands of workers at General Motors (NYSE:GM) who were on strike in October.

This positive number made it 110 consecutive months of job gains, continuing the record-long expansion. The average monthly job gains for 2019 is 167,000. This is down from 223,000 in 2018. On the one hand, this suggests that the stimulus from tax cuts is wearing off. On the other hand, the fact that the economy continues to add jobs can’t be ignored.

The unemployment rate dipped from 3.6% to 3.5%. This puts unemployment at its lowest level since 1969. Combined with the labor participation rate that is over 63% and the report provides statistical evidence that more workers are re-entering the workforce.

And as they re-enter the workforce, they are seeing higher wages. The jobs report showed that average hourly earnings climbed 0.2%. Wages are also up 3.1% year-on-year.

By any measure, this was a strong jobs report. And it is good news for investors. With lingering uncertainty regarding the U.S.-China trade war, and an earnings season that is showing softening profits, there was a school of thought that suggested the jobs report would come in below the forecast estimate for 180,000 new jobs.

Here are three takeaways for investors.

1. The Fed is likely to hold its powder – When the Federal Reserve announced their latest interest rate cut in October, Fed Chairman Jerome Powell suggested that no more rate cuts were being planned. The strong jobs report makes it a virtual certainty that the Fed will leave interest rates unchanged when they meet next week. While some investors may see this as bad news (the market has responded positively to previous rate cuts), the jobs report removes uncertainty.

“This fits with our overall view that the U.S. economy is slowing, but faces only minor risk of recession,” said Cailin Birch, a global economist at the Economist Intelligence Unit.

2. The U.S. economy is largely shrugging off the trade war – The conventional wisdom is that the trade war is doing more damaging to the Chinese economy than the U.S. economy. This report is showing that this may be true. It also emphasizes that perhaps the usual ways economists look to measure the health of the economy needs to change. However, some economists remain unconvinced.
   
   “The further downtrend in labor demand evident in the surveys last spring is a consequence of both the direct costs imposed on business by the tariffs and the crippling uncertainty over future trade policy,” said Ian Sheperdson, chief economist at Pantheon Macroeconomics.
   
   
3. The economy is changing, not slowing - The economy is changing in ways that investors and Americans are still trying to understand. For example, third-quarter earnings reports for the retail sector showed clear winners and losers. This is mostly due to the use, or lack thereof, of technology to compete with Amazon (NASDAQ:AMZN). Department stores like Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) reported poor earnings. However, other stores like Target (NYSE:TGT) and Family Dollar (NYSE:FDO) are delivering strong results. The Black Friday weekend which culminated with Cyber Monday showed that the consumer is doing their part to make this a profitable holiday season.

In a sense, this economy feels a bit like it did in the late 1990s. The rise of dot-com companies changed the skill set that was required for companies to compete. In response, companies found it difficult to find workers with the skills to fill the positions they required. Fast forward to today and you’re seeing some of those same issues. Technology continues to evolve and change the skills that workers need to have to compete.

However, the economy is also changing in the way we think about what makes a company when you look at stocks that are reflected in emerging companies like Beyond Meat (NASDAQ:BYND), or the way blue-chip companies such as Disney (NYSE:DIS) continue to re-invent themselves to compete in the new economy.