September’s employment report was well above consensus expectations, raising the possibility of a soft landing. 254,000 new jobs were added and unemployment fell. Below, four market experts share how investors should allocate their money going forward.
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After much anticipation, the employment statistics for September have finally been announced.
The U.S. job market has outperformed economists’ forecasts, with total nonfarm payrolls increasing by 254,000 jobs last month, more than 100,000 more than expected. The unemployment rate fell to 4.1% from 4.2% in August.
This optimistic data broke the continuous slump in job growth that the U.S. economy experienced in July and August.
It is increasingly likely that the Fed has succeeded in achieving a soft landing by raising interest rates to control inflation without damaging the labor market to the point of recession. With this in mind, how should investors allocate their funds accordingly? Below, we’ve compiled the opinions of four Wall Street experts on the state of the labor market and the overall economy.
Liz Ann Saunders, Chief Investment Strategist, Charles Schwab
While the headline numbers may be eye-catching, Saunders believes some of the other data points say more about the economy as a whole.
According to Saunders, a blanket economic recovery cannot be expected. The strength of service employment compensates for the weakness of manufacturing. Saunders specifically highlighted health care and government as sectors that have seen strong hiring trends over the past few months. She said the manufacturing industry was in recession, as evidenced by the continued contraction in the ISM manufacturing index.
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Sectors that added the most jobs include food services, health care, government, social assistance, and construction. On the other hand, manufacturing employment decreased by 7,000 people.
Interest-rate-sensitive parts of the market, such as utilities, financials and real estate investment trusts (REITs), should continue to perform well, Saunders said.
Saunders believes it will be a long road back to normal. Even though the Fed has begun a campaign of monetary easing, it is still too early to think that a recession has been avoided.
“We still want to maintain quality,” Saunders said. Investors should focus on a company’s profitability and look for a strong balance sheet, free cash flow, and return on equity. These characteristics can help high-quality companies weather continued economic instability.
Jeffrey Roach, Chief Economist, LPL Financial
Roach said there was no need for the Fed to begin cutting rates more aggressively by 50 basis points because the jobs report was better than expected.
Individual consumers are holding up well. Mr Roach said layoffs had remained low over the past three months and wage growth had remained strong, meaning households were able to absorb some of the impact of higher inflation. Average hourly wages increased by 0.4% in September, up 4% from the same month last year, indicating continued growth in real purchasing power.
If you have cash lying around, Roach recommends holding off on investing in stocks for now. He expects volatility to continue to rise in the lead-up to the election, and believes he will find better entry points into the stock market later.
Roach added that now is the time to continue taking advantage of interest rates on money market funds and short-term bonds before they drop into next year. He expects a rate cut of 100 basis points (bp) within the next year. Mr. Roach particularly emphasizes preferred securities. Preferred securities reduce portfolio volatility, provide income, and reduce interest rate risk.
Lisa Charette, Chief Investment Officer, Morgan Stanley Wealth Management
Charette said the labor market is being influenced by the strong earnings and balance sheets of American companies.
“In this market, companies have continued to hire employees aggressively without panicking,” Charette said.
The decline in the unemployment rate in September and the continued trend of curbing layoffs are positive signs that business performance is strong. In Charette’s opinion, there is no need for the Fed to cut interest rates aggressively going forward.
Charette recommends investors focus on high-quality companies and continue to look for value in the overall market as the market expands. Although he believes the economy is not yet strong enough for small-cap stocks to take off, the increasing likelihood of a soft landing makes mid-cap stocks a good investment opportunity. Investing in an equal-weighted market index allows investors to increase exposure to non-tech companies. And now, with interest rates slowly but steadily falling, Charette recommends moving up the yield curve through investment-grade bonds with durations of four to six years.
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance
September statistics show signs of strengthening the job market.
“This should end any notion that the economy is about to fall off a cliff or that impending doom is looming, at least for the next month,” Zaccarelli said in an email.
While investors have reason to be optimistic, Zaccarelli cautions that they shouldn’t focus too much on any single data point. Just as one or two weaker-than-expected reports are not a sign of a recession, one stunning report doesn’t mean a full recovery in the economy.
That said, Zaccarelli says the current environment offers many opportunities to invest in stocks. I prefer fields such as industry and materials. Zaccarelli believes these cyclical areas of the market will outperform unless the economy slips into recession, which seems increasingly likely after this jobs report.
“With recession fears on the rise, we believe parts of the market are cheap and undervalued,” Zaccarelli said.
