CWS Market Review – October 8, 2024

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The Economy Created 254,000 Jobs Last Month

Last Monday, the stock market closed out the quarter and month at an all-time high. Through September, this year’s market is on pace for being the strongest market in a presidential election year since 1928.

This has happened despite numerous reasons for investors to be scared. Nevertheless, the stock market keeps on climbing.

There’s an important lesson for investors in this. The long-term trend is very much in your favor. To be a good investor means you simply have to wait out bad times.

Wall Street then got a big shock on Friday when the Labor Department reported that the U.S. economy created 254,000 net new jobs last month. That was well above expectations for a gain of 150,000 new jobs. The unemployment rate ticked down to 4.1%.

I looked at the decimals, and the unemployment rate was technically 4.051%. In other words, the jobless rate came very close to rounding down to 4.0%.

The unemployment rate is lower today than it was in every single month from February 1970 to November 1999. (To be transparent, they have changed the methodology on that data several times.)

Wall Street liked the news. On Friday, the stock market rallied close to 1%. The market was up another 1% today.

Many of the details in the report are quite good. For example, the labor force participation rate for prime working-age adults is near a multi-decade high.

The jobs gain data for August were revised higher to 159,000. July’s number was increased by 55,000 to a monthly gain of 144,000.

I was very happy to see that average hourly earnings increased by 0.4%. That was 0.1% ahead of expectations. Over the last year, average hourly earnings are up by 4% which is ahead of inflation, but not by much. Still, it’s good to see that workers are finally getting a raise. One concern is that the average workweek fell by 0.1 hours to 34.2 hours.

Here are some details:

Restaurants and bars led job creation for the month, with the hospitality industry adding 69,000 positions in September after averaging just 14,000 over the previous 12 months.

Health care, a consistent leader in job growth, contributed 45,000, while government grew by 31,000. Other gainers included social assistance (27,000) and construction (25,000).

A more encompassing measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons dropped to 7.7%. The share of the workforce either working or looking for work, known as the labor force participation rate, held steady at 62.7%.

One interesting detail in Friday’s report is that many full-time positions were created last month. The number of part-time jobs decreased by 95,000 while fulltime employment increased by 414,000.

Where does this leave the Federal Reserve? That’s a good question. The Fed has made it clear that it wanted to lower rates before the economy skidded off the road and plowed into a ditch. Now it appears that the economy is doing well. Or at least, well enough. So are all these cuts needed?

The answer is probably yes. The Fed meets again early next month, just after the election. The futures market thinks the Fed will go ahead with another 0.25% rate cut, and that’s probably right. Some think the Fed will hit us with another 0.5% but I’m a doubter.

As I’ve said before, the best way to view these rate cuts is as the Fed undoing its aggressive rate hikes from 2022 to 2023.

However, the big news before the Fed meeting will be this Thursday’s CPI report. The last few CPI reports have shown benign inflation, but that was with weaker jobs growth.

For September, Wall Street expects inflation of 0.1% and core inflation of 0.2%. If that’s right, it means that both core and headline inflation are slowly moving to the Fed’s target of 2%.

Some people have suggested that the good jobs numbers will alter the Fed’s course. I think it’s too early to say. Remember the basic formula: lower rates are good for value and higher rates are good for growth stocks. Interestingly, growth stocks have done well over the last few days so there’s been some impact on the mind of the market.

Yesterday, the yield on the 10-year Treasury broke above 4%. This got a lot of attention, and it’s an important psychological level, but the yield is lower than it was during much of this summer.

The overall outlook is that rates are headed lower. The only question now is about speed. The futures market expects the Fed to cut by 0.25% at its December meeting as well. For 2025, traders think the Fed will cut rates by 1%. If inflation continues to fade away, that could be the correct policy.

Tomorrow, the Fed will release the minutes from its last meeting. These are usually pretty dull affairs, but this time could be an exception. For one, the Fed decided to cut rates by 0.5%. Also, there was one dissenting vote. The Fed has made it clear that rates are going down.

Stock Focus: Public Storage

As I’ve said, when rates are headed down, you want to make sure you have some high-yielding stocks in your portfolio. These means sectors like utilities and REITs which brings me to one of my favorite REITs.

Let’s say your boss offers you a big raise and a promotion, but the catch is that the job requires you to move out of the country. You love to see the world, so you jump at the chance.

But there’s one nagging question: what do you do with all your stuff?

Nowadays, there’s an easy answer. You rent a storage unit. There are lots of these facilities all over the country. If you look long enough, you’re bound to come across Public Storage (PSA).

Public Storage is the largest self-storage real estate investment trust (REIT) in the United States. There are currently more than 3,000 Public Storage locations around the world. The company is based in Glendale, CA.

If you’re not familiar with a REIT, it’s basically the landlord of some real estate. If the REIT pays out almost all of its income to shareholders, then it gets preferential tax treatment. As a result, REITs often have good dividend yields. It’s a great way to invest in real estate.

Public Storage was founded in 1972 by B. Wayne Hughes and Kenneth Volk Jr. During a trip to Texas, Hughes saw that local real estate developers had made, in effect, mini storage units, so he decided to bring the idea to Southern California. It was a brilliant idea because he could charge as much as apartments in term of price per square foot. The difference is that the upkeep costs were far less.

The business quickly took off and by 1989, it had grown to 1,000 locations. PSA officially became a REIT in 1995. Today it has a market cap of $61 billion, and PSA is one of the largest REITs around.

More than 90% of PSA’s revenue comes from its self-storage business. The company does a lot more than just provide the space. They also provide a broad range of services for their clients. PSA offers insurance and packing products. The company also has a subsidiary that provides boxes and truck rentals.

It’s an interesting business because the storage lots tend to be located in unforgiving parts of large cities. They’re often located in dense clusters near freeways and intersections. It’s also interesting that PSA has relatively few employees. The lots are automated so customers can access their units at any time.

As any fan of the TV show Storage Wars knows, abandoned units are auctioned off. (Despite what you may have heard, most abandoned or unpaid lots contain useless junk.)

PSA has been a tremendous business over the years.

Thirty years ago, you could have picked up one share of PSA for $7. Since then, the stock has increased by 50-fold. And that doesn’t include dividends. If you include dividends, then PSA gained over 500-fold. All from renting storage units.

I really like PSA’s dividend. The company currently pays out a quarterly dividend of $3 per share, or $12 for the year. Think of it this way: If you had bought PSA 20 years ago, you’d now be yielding over 20% based on your original purchase price.

I also like that PSA is the dominant player in the industry. The company buys up smaller companies all the time. There hasn’t been much self-storage building recently. That means there’s been a scramble to buy out smaller storage companies. There are lots of small operators and they’re happy to sell to PSA.

Public Storage currently yields 3.5% which isn’t that far below the current 10-year Treasury’s yield. The next earnings report is due out in three or four weeks.

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

– Eddy

Posted by on October 8th, 2024 at 5:32 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.