Nonfarm Payrolls February 2019

20,000 new jobs in February… that’s all? A precipitous drop in hiring activity during the second month of 2019 was offset by some more benign datapoints including year over year wage gains, a dip in the unemployment rate, and improvement in U6- the broadest measure of unemployment. While 20,000 will surely garner most of the attention today, we would call your attention to the fact that the rolling 3-month average for jobs created in the US is still humming along at ~186k/month and the data from BLS will be inherently noisy largely due to the prolonged government shutdown. The U6 rate hasn’t gotten much attention in light of the substantial headline jobs figures reported in the prior two months, but it is a relief to see this measure of unemployment tick down substantially in February by ~0.8% to 7.3%; it jumped ~0.5% in January in spite of a solid jobs report. Wages increased 3.4% year over year and the unemployment rate declined to 3.8% in the month of February. Meanwhile, the labor force participation rate held at 63.2% month over month. In terms of the average US workweek, its duration is little changed mom and yoy at 34.4/hrs. All in all, not great but not exactly an economic death knell.

The global growth picture has gotten murkier. Recent PMI data show Eurozone manufacturing has slipped into contraction with Spain, Italy, and Germany leading to the downside. Taken together with commentary from the OECD and ECB, this reading seems to corroborate the case for increased stimulus for EU countries. As a side note, UK manufacturing continues to expand. Mario Draghi surprised markets with a downgrade in expectations for 2019 European growth and intends to make new loans available, thereby adding stimulus to the Eurozone. In other news, China has also marked down its growth expectations for 2019, while simultaneously reducing value added taxes (VAT) to actively stimulate its local economy. At the end of the day, we are still talking about growth albeit somewhat diminutive in certain regions around the world.

This is consistent thematically with the TWP outlook for a growing yet slowing world. Economic growth should remain somewhat intact for the foreseeable future (there will likely be a couple of exceptions), and S&P 500 profits should continue to grow but at a pace that is below what most people would call “robust.” So, while we can expect earnings growth, we can also expect a lower multiple for earnings whose expected growth trajectory is “flattening.” We feel that is adequately captured in our current S&P 500 fair value estimate of 2800. However, we would also suggest that this estimate might prove to be too conservative should the growing dovish chorus among global central bankers grow louder. We are already beginning to see that domestically and abroad. As always, we will keep you posted.            

Market Outlook: Bullish USD, Neutral Duration, Neutral Equities