Recession? More like boom times.
The January jobs report revealed a whopping 517,000 blast-off employment gain number versus a consensus expectation of just 188,000. It was the biggest gain since February last year. The household employment report used to gauge hourly data showed a monster 894k jobs add.
The unemployment rate crashed to 3.4% – a new post-cycle low. Average hourly earnings rose 0.3%, which matches last month’s low-water mark. Year-on-year, the rise was 4.4% – that is the lightest since August 2021 when it was 4.3%. The average workweek was 34.7, which was the highest since February last year – a major jump.
The labor force participation rate was 62.4 – which equals the highest since last March. Revisions were also positive, further proof of an extraordinarily strong and tight labor market.
It was the 25th consecutive month of net jobs gained. Interestingly, not since 1959 has there been a year with a recession in which one of the months featured a 500k-plus NFP gain.
Hot, Hot, Hot NFP Jobs Report
UR Back to 1969 Level
The hot report led to a jump in yields, while equity futures fell in their knee-jerk reaction. The 10-year rate jumped to 3.48% while the 2-year note’s yield climbed back to 4.20% – not far from where they were earlier this week. The Fed’s terminal rate is now priced at 4.96% versus 4.91% before the NFP report.
With higher hours worked and lower output, productivity appears to have been very soft in January. A thought is that we are either mismeasuring GDP or how jobs are tabulated. We’ll see how the rest of the year unfolds. Many retail firms have cited a much easier time attracting workers, so something does not jibe.
Shortly after the 8:30 am data, S&P 500 futures were around 1% lower, but near to where the market was indicated earlier in the morning after disappointing earnings on Thursday night.
Taking a step back, Michael McDonough reports that stocks tend to perform rather poorly in the days after the monthly NFP release. But it’s also important to keep in mind that the data in the chart below spans early 2022 through today (which was a generally bearish period). After a big equity jump year-to-date of +9% (the best since 1987), we may see some profit-taking.
Bearish Employment Report Reactions
So, is today’s hot employment report good longer-term for cyclical names? Well, glamour stocks are back in vogue, but the broader trend, arguably since late 2020, has been value’s outperformance.
The Vanguard S&P 500 Value ETF (NYSEARCA:VOOV) is on pace to close this week at fresh all-time highs while the Vanguard S&P 500 Growth ETF (VOOG) is still 25% below its late 2021 peak. So, perhaps the sudden and steep rise in growth to jumpstart 2023 is merely a corrective move rather than a broader trend.
According to Vanguard, VOOV invests in stocks in the S&P 500 Value Index, composed of the value companies in the S&P 500 (SP500), and focuses on closely tracking the index’s return, which is considered a gauge of overall U.S. value stock returns. This large-cap value fund has a low 0.10% annual expense ratio and boasts a low 3 basis point median 30-day bid/ask spread with a 1.8% 30-day SEC dividend yield. Holding 408 stocks with a median market cap of $92.5 billion, you actually get exposure to a lot of names here, with higher weights given to more value names, but some growth stocks are in the index with small weights. VOOV trades at 18 times last year’s earnings, so it is not tremendously cheap. Investors might want to consider SPDR Portfolio S&P 500 Value ETF (SPYV), as it has a lower expense ratio and can be more liquid due to its bigger size than VOOV.
Value (Total Return): All-Time High
Digging into VOOV, you might be surprised to see that three of the top six holdings are what you might consider to be growth stocks. But after a 2022 drubbing, Microsoft (MSFT), Amazon (AMZN), and Meta Platforms (META) were shifted partly into the value index by S&P Dow Jones Indices. That has been a winning trade this year, with each of those 3 techy names up more than 10% (Amazon is +34% and Meta is +57% on the year).
VOOV: Some Growth Stocks Tossed In
What’s interesting right now is that U.S. Value remains relatively cheap to U.S. Growth. The chart below from J.P. Morgan Asset Management shows that the valuation Z-scores (which compare the current valuation to the 20-year average – the higher the Z-score the more expensive) favor an overweight to value as of the end of January. The scores on the doors are 0.71 for value versus a full standard deviation to the expensive side for growth.
Growth Still Pricey vs. History Compared To Value
The Technical Take
VOOV looks to finish this week at a fresh all-time weekly closing high, but there are still intraday highs to take out near $155. Still, I see a bullish cup and handle breakout pattern underway after a strong thrust in recent days. With a low near $123 and a former resistance line at $147, the presumption is that the ETF will now rally to $171 based on the measured move breakout. That’s about 10% more upside from here.
A long play with a stop under $140 makes sense. Also take a look at the 200-day moving average, which is flattening and may soon turn positive in its slope. Meanwhile, the RSI momentum reading confirms the price breakout as it has climbed above its December peak. With ample volume under the current price level, there should also be support on pullbacks into the $140s.
A Value Breakout?
The Bottom Line
A strong labor market should be beneficial for value sectors. Higher interest rates should also favor value over growth. With new all-time highs in VOOV, I think a further rally is possible despite a near-term ebb due to the hot jobs numbers.