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Strategic Insights

Volume 8, Edition 42 | December 2 - December 6, 2019

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A Job Well Done

Doug_Walters Doug Walters | Articles

Read Time: 3:30 min

JOBS_REPORT

A buoyant jobs report on Friday saved U.S. stocks from a down week. Nearly a decade of slow, steady job growth has been a recipe for above-average investor returns.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko ,

U.S. stocks were bailed out by an early Christmas present from Friday’s jobs report, where November non-farm job creation was higher than expected. Monthly changes are notoriously volatile, so we caution reading too much into them. Annual growth is much more insightful and paints a picture of modest but steady job creation for the past eight years. Growth slid for much of this year but appears to have bottomed within the familiar range of the recovery.

Many economic commentators complained over the past decade about the “slow recovery” from the lows of the financial crisis. While the pace of recovery may not have been palatable to the underemployed, it has been a feast for investors in U.S. equities, with the S&P 500 up 240% over the past decade. Unemployment is now low, and wage growth is outpacing inflation, so here’s to another decade of middling-to-mediocre economic growth!

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240%

10-Year Total Return of the S&P 500

There have been many complaints about the pace of U.S. recovery since the financial crisis in 2008. While job growth has never been spectacular, it has been fairly consistent for much of the past eight years, averaging about 200K jobs created per month. Annual job creation peaked in 2015 at a pace of 260K jobs per month and currently stands at 183K. While these figures are well below the peaks of the 1990’s (326K) and 1980’s (410K) what makes them exceptional is not the magnitude, but the duration of the growth. In 80 years of data, we cannot find a longer period of sustained 160K+ growth. The steady growth may not have felt spectacular, but it spearheaded a 10-year boon for U.S. equities, up 240% or about 13% per year. Slow and steady wins the race again.

Headlines This Week

Working-out

The U.S. economy added 266,000 jobs in November, blowing past the Street consensus of 184,000.

  • Prior two months revised up 41,000.
  • Manufacturing jobs saw a big uptick in November, thanks to General Motors’ strike settlement with the United Auto Workers union (UAW).

Trade Confirm

  • China’s Ministry of Finance announced tariff waivers for US soybean, pork, and some other commodity products.
  • China’s insistence on some rollback of existing tariffs along with enforcement issues is delaying a phase one trade deal.
  • Despite this week’s chatter surrounding US-China trade relations, the consensus remains a near-term trade deal.

Europe

  • Germany’s disappointing industrial production, along with weak factory orders, is painting a gloomy economic picture for the European Union (EU).
  • The European Central Bank (ECB) maintains an easy monetary policy, where several countries in the EU already carry negative interest rates. Yet, economic growth and inflation have shown no signs of improvement.
  • In our previous issue, “Time to Sell,” we mentioned how the European Central Bank (ECB) is pushing for European governments to use fiscal policy. But many countries are already at their limits.
  • Germany is looked at as the only country within the Union that can reverse the region’s economic growth woes.

The Week Ahead

FOMC & Interest Rates

  • In the U.S., the Fed will deliver its interest rate decision, as well as holding an FOMC press conference on Wednesday.
    • Experts are predicting no change in interest rates this time around.
  • Over in Europe, the ECB will be announcing its own interest rate decision on Thursday.
    • The consensus also seems to expect no change in rates for the European Union next week.
  • In addition, the U.S. is releasing the month-over-month and year-over-year CPI reports for November on Wednesday.

U.K. Parliamentary Election

  • Early polls indicate the ruling Conservative party is in no immediate danger of ceding office to the Labour party.
  • Depending on how clear of a majority the leading party has will have a significant impact on Brexit negotiations going into 2020.

Earnings Reports

  • Costco has warned it saw an impact on sales due to the later Thanksgiving holiday this year, as well as technical issues on its web site on Thanksgiving and Black Friday.
  • Oracle has seen its debt rating downgraded recently as it has borrowed heavily to finance its stock buyback campaign.  While the buybacks have helped prop the stock up, the report should shed light on business fundamentals.

Stock Highlights from Max

The Beauty Returns

A big day on Friday boosted the market into the green for the week. The Industrial sector was the biggest laggard. The winner this week was the Consumer Discretionary sector, with not one but two companies lighting up the scoreboard, but for different reasons…

Ulta beauty

  • Ulta Beauty, Inc. (ULTA) beat expectations on earnings and came a bit shy on sales when it reported its quarterly results. While the headline results were not all that gorgeous, the comparable sales and guidance were. Comparable sales were higher by 3.2% in the quarter, which was slightly better than expectations. Transactions were up 2.3%, and average ticket was up just shy of 1%. The company served up guidance of over 10% revenue growth next quarter. While results were merely better than feared, it was enough to summon back investors who fled the stock when the growth numbers started to soften last quarter.  Another stock enjoying a great week was…

Expedia Logo

  • Expedia Group Inc. (EXPE) announced a major shakeup in management. Both the CEO Mark Okerstrom and CFO Alan Pickerill resigned immediately. The board chairman, media legend Barry Diller, and Vice-Chair Peter Kern will manage the company until a long-term replacement for both is named. As a sweetener to investors, Diller also announced a 20 Million share buyback. Diller explained that the board and the ousted management disagreed on strategy. The company was undergoing a major reorganization focused on brand and technology consolidation of its various brands. The board believed this caused the company to lose focus on current operations and, ultimately, report an ugly quarter. Diller also announced he would be buying shares of the company as an indication of his confidence. Okerstorm took over for Dara Khosrowshahi in 2017 when Dara unexpectedly jumped to run the then private Uber.

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