Date: February 6, 2023

Inexplicably Strong Employment – Good News is Bad News

On Friday, the government announced that 517,000 new jobs were created in January. That’s about what I would expect. If the economy had just troughed and a new expansion was beginning. 500,000 new jobs almost two years into a recovery is almost unheard of. I thought it was a typo when I saw it. 187,000 was expected. I am still shaking my head, not fully believing the number. Of course, the conspiracy theorists are out in full force that Biden & Company manipulated the data. Folks, if the government actually does that which I don’t believe, who would throw out a number so far from the norm, so far from an election? To what end?

I am sure there were a few anomalies in the report. Striking workers going back to work. Seasonal factors. And while I do think the number will be revised lower in four weeks, I do not believe it will be cut in half to something more reasonable. The unemployment rate fell from 3.6% to 3.4%, a new 50+ year low. 11 million jobs remain open, roughly double the number of available workers. That should continue to put upward pressure on wages and prevent the Fed from doing a full stop. But it also forestalls recession yet again.

I still chuckle thinking about all those people who were absolutely convinced the U.S. was in recession mid-2002 because we had back to back negative quarters of GDP growth. As that old tuna fish commercial used to say, “Sorry Charlie”. My base case was for a mild recession in 2023 with the outside possibility that the Fed could engineer that elusive “soft landing” like 1995. Except for jobs the data still point to that, but believe me, I would celebrate being wrong on this one.

The stock market was schizophrenic on Friday, first plunging on the news and then rallying into green before falling hard after lunch into the close. This is a good news is bad news market. On Thursday I tweeted about it being a great day to “feed the ducks” a Wall Street reference to an old saying, “when the ducks quack, feed them”. That means when investors crave stocks you sell them. I cut back some very long market exposure. After Friday I wish I had cut more the day before. Stocks look to open the week with some downside follow through of up to 1%. There should not be a whole lot more coming.

The upside target for this rally should be around the range of the August highs. On the S&P 500 that is somewhere around 4300. The S&P 400 is already well above that area. I continued to advocate buying any and all mild or modest pullbacks. Investors have been left holding the bag in 2023 with too much cash and defensive stocks. The masses all came into 2023 with bearish forecasts. Unless I am completely wrong and stocks fall hard right away, the masses are in trouble and need to chase stocks. While I do not expect some dyed in the wool bears to change so quickly, I sense others are questioning their conviction and seeking a way to save face.

On Friday we bought PFE, EFA, levered S&P 500. We sold EMB, VGK and BK.


Paul Schatz, President, Heritage Capital