How Should Investors Play Another Blowout Jobs Report?

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Make no mistake, Friday’s jobs report was a blowout. I am sure there will be some who, reluctant to give this President credit for anything, don’t want to hear that, but they can console themselves with the knowledge that it is simply a continuation of a trend that started well before the Trump era.

As I have stated many times in the past, Presidents actually have very little impact on the economy and what impact they do have tends not to show in any data for several quarters if not years, so it is ridiculous to allow your political biases to color your interpretation of economic data.

I am sure some people still will, but the fact is, regardless of your political preferences, the U.S. economy is humming, at least on the jobs front.

However, given the addition of 304,000 jobs in January despite the effects of the government shutdown, the market reaction was extremely muted; the S&P 500 finished Friday only a couple of points above Thursday’s close. That is explained by two things.

First, the current situation is not what is causing concern among traders and investors. They are looking ahead and worrying about the potential for a global slowdown as trade tensions continue. Secondly, the strength in the job market comes just after the Fed has indicated a softer line on future rate hikes and, if the trend continues, it may cause them to rethink that position.

That dynamic, where even very good news has a potential negative attached, is nothing new. It is what drove stocks lower in the last quarter of last year, even as the data indicated earnings and the jobs market remained strong. What it does mean though, is that investors should be careful about drawing broad conclusions from any data point.

More jobs were created last month than anyone expected, but that doesn’t mean that every stock is going to fly.

If you are looking to play the positive effects of the jobs report, therefore, it is better to concentrate on its direct impact, and that means companies that are in the jobs market themselves. Companies like Robert Half International (RHI) and Manpower Group Inc. (MAN) stand to gain as hiring conditions for potential employers tighten even more.

Those employers will need help in finding the right candidates and in many cases will be forced to consider temporary solutions. That is all good news for both RHI and MAN.

As you can see, despite beating expectations for Q4 earnings in both cases, RHI and MAN are trading significantly lower than their 52-week highs. Robert Half has a forward P/E of 13.2 and, more interestingly, a PEG (P/E to Growth) ratio of 0.35. Anything under 1.0 in that metric is generally considered to indicate good value.

Manpower is more attractive on a forward P/E basis at 9.6, but a PEG ratio of around 1.6 suggests that growth expectations there are a problem. However, as the job market tightens even further, their services will be more in demand and their pricing power will increase, making this a play on better than expected growth.

A good jobs report is a sign of generalized economic strength, so is normally a good indicator for stocks across the board. Right now, though, with traders seeing the big black cloud in front of every silver lining even Friday’s great news was greeted with a collective shrug of the shoulders.

Given the ongoing trade war between the world’s two largest economies, that makes some sense when it comes to manufacturing and a few other sectors, but, assuming that well established trend continues, investing directly in the jobs market by way of RHI and MAN makes sense.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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