CWS Market Review – February 8, 2022

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The Blowout January Jobs Report

Last Friday, the government released the jobs report for January and the numbers were quite good. In fact, they were so good that they’ve had a major impact on what the Federal Reserve has planned, and by extension, the outlook for the stock market.

The bottom line for us is that this is a very good time to own conservative and defensive stocks, just like we have on our Buy List. In this issue, I want to lay out the case in more detail.

First, though, let’s look at the jobs report. During January, the U.S. economy added 467,000 net new jobs. That more than tripled expectations of 150,000. On top of that, the numbers for November and December were revised much higher.

Although the unemployment rate ticked higher to 4.0%, that’s still quite low by recent historical standards. Some of that is driven by fewer people looking for work, but make no mistake, there is underlying strength in the labor market.

For context, in March and April 2020, the U.S. economy shed 22 million jobs. That’s a staggering loss. Since then, the economy has added back 19.1 million jobs. We’re not that far from hitting a record high for number of employed folks.

This is a shift in the outlook for the economy. When the December jobs report came out, it was a complete bust. The Bureau of Labor Statistics said that only 199,000 new jobs were created in December. That was less than half of what was expected. On Friday, that number was revised upward to a gain of 510,000 new jobs.

Here’s a look at the stock market (in red) along with the unemployment rate (n black).

For November, the number of jobs created was revised from a wimpy 249,000 to a brawny 647,000. I should add that these revisions are part of a larger annual revision.

Digging into the report, we see that the largest gains came from leisure and hospitality which added 151,000 jobs. Of that, 108,000 jobs were in bars and restaurants (I did my part). Retail added 61,000 and professional and business services added 86,000. Kathy Jones, the chief fixed income strategist at Charles Schwab, said, “It’s hard to find a weak spot in this report.” I have to agree.

The broader U-6 unemployment rate is nearly back to where it was pre-Covid. It’s now at 7.1%. The last pre-Covid low was 6.8% in December 2019. That number can be a better stat to watch for the true health of the economy.

The Labor Force Participation Rate rose 0.3% to 62.2%. That’s the highest since March 2020. This tells us how many people are out there working or looking to work. It’s not that far from where it was before Covid.

The LFPR can be distorted because of the growing ranks of retired folks. But the LFPR for prime working age (25 to 54) is back to 82.0% which is higher than where it was in 2017 and much of 2018. (Frankly, some people tend to overemphasize the importance of the Labor Force Participation Rate.)

Higher Rates Are Good for Defensive Stocks

The blowout jobs report has caused some investors on Wall Street to speculate that the Federal Reserve could hike interest rates next month by 0.5%. That was an outlandish view a few weeks ago, but since Friday’s jobs report, it’s now gone mainstream.

It could happen, but I won’t venture a guess as to what precisely the Fed will do. I’m more concerned with its general policy for this year. I think it’s very likely that the Fed will raise rates at each of the next four meetings, give or take. After that, it may take a more gradual approach. If this is right, that’s very good news for defensive investing.

The key point is that the Fed wants to convey to us investors that they’re not behind the curve regarding inflation (which, of course, they are). The Fed also wants to make a clear break from their “transitory” language that they used much of last year. In plainer terms, the Fed wants to seem hawkish now due to their own laxity over the previous two years.

As Milton Friedman said, there’s no such thing as a free lunch. That’s especially true with monetary policy. You’ll pay now or you’ll pay later, but you will pay.

Ideally, I suspect the Fed wants to have short-term interest rates at or near 2% between one year and 18 months from now. The next key test comes this Thursday when the government releases the inflation report for January.

The last inflation report showed that consumer prices rose by 0.47% in December. That was more than expectations of 0.4%. The good news is that energy prices finally started to ease up in December. For the month, energy prices fell by 0.4%. Within that, gasoline was down 0.5% and fuel oil was off by 2.4%. Still, we had significant energy inflation last year. Energy was up 29.3% in 2021 and gasoline increased by nearly 50%.

In the most-recent CPI report, Wall Street was really spooked by the core rate, which excludes volatile food and energy prices. For December, core inflation rose by 0.55%. That was more than expectations of 0.5%. Used car prices have been a particular trouble spot for inflation. During 2021, used car prices increased by 37.3%.

For all of 2021, headline inflation ran at 7.12%. That was the highest rate since June 1982 (see the chart above). The core rate increased by 5.49%. That’s the highest since February 1991. So we’re looking at 30- or 40-year highs for inflation depending on which measure. You can see why Wall Street is less than convinced by the Fed’s projections.

For Thursday, Wall Street expects to see both headline and core inflation of 0.4%. If that comes in high, Wall Street will not be pleased.

The Fed doesn’t meet again for another five weeks so a lot could happen between now and then. At the futures market, traders currently think there’s a 29% chance that the Fed will hike by 0.5%. The traders said that there’s a 71% chance of a 0.25% rate hike. According to the futures traders, there’s literally a 0% chance of the Fed doing nothing.

Earnings from AFLAC and Hershey

I want to home in on the point that this is a good time for conservative, defensive stocks. In the premium issues, I’ve been talking about our recent earnings reports. (Reminder, sign up!).

I was particularly impressed by last week’s reports from AFLAC and Hershey. These are very good examples of the kinds of stocks that can prosper in this environment.

Last week, AFLAC (AFL) said it made Q4 earnings of $1.28 per share. That’s an increase of 19.6%. The weaker exchange rate pinged earnings by five cents per share. Wall Street had been expecting $1.27 per share. This was another very good quarter for AFLAC.

For the year, AFLAC made $5.94 per share. That’s up nicely from $4.96 per share in 2020. Forex pinged this year’s bottom line for six cents per share. Adjusting for that, AFLAC’s earnings were up 21% last year to $6 per share.

AFLAC is already up 13.1% for us this year. That’s not bad for a little over one month. On Thursday, the shares hit a new 52-week high of $66.30. AFLAC has always been a good stock but it’s gotten a lot more attention recently because the Fed raising rates won’t hurt it.

Check out this chart:

On Thursday, Hershey (HSY) said it made $1.69 per share for Q4. That topped the consensus of $1.61 per share. Business is so strong that Hershey has boosted its capacity, yet it still can’t keep up with demand. Thank you, Covid!

Hershey said it expects 2022 earnings of $7.84 to $7.98 per share. That’s a very optimistic outlook. The consensus on Wall Street had been for $7.57 per share. Hershey is a 7% winner for us so far this year. On Thursday, shares of HSY rallied to an all-time high of $207.21. The stock has more than doubled in four years.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on February 8th, 2022 at 7:42 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.