Non-Farm Payrolls Preview For April 2024: 3 Major Considerations

seekingalpha05-01

April 2024 jobs report expected to show an increase of 250,000 jobs, indicating continued tightness in the labor market.Healthcare sector likely to add jobs, while drug manufacturers may struggle....

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Jobs in March rose by 303,000, sharply above the average monthly gain of 231,000 over the last 12 months. Skeptical readers will cite government jobs increasing by 71,000 for last month’s NFP job report. Others will point out the unemployment rate of 3.8% benefited from around 4.3 million people getting part-time work. Diving into the detailed data, the 99.989 million people not in the labor force is a more meaningful figure than the part-time count. Readers need to digest the report in the same way the Federal Reserve assesses the employment situation. The Federal Open Market Committee (“FOMC”) has a mandate to achieve maximum sustainable employment and price stability. Even though the personal consumption expenditure price index of 2.8% will keep interest rates at over 5% for the foreseeable future, the NFP report is just as meaningful.   BLS Above: Part-time jobs increased from last year while falling from the month before. What should investors expect from the April 2024 jobs report? There are three major considerations. 1/ 250,000 Jobs Added in April The April report should indicate continued tightness in the labor market. The month-over-month change stabilized in the 180,000 to 300,000 level range. An increase of 250,000 jobs in April would fall within that range.   BLS Low unemployment levels will allow workers to negotiate better wages. Still, average hourly earnings increased from $28.58 last March 2023 to $29.79 ( page 38), a 4.23% increase. In March, the consumer price index increased by 3.5%. When wage growth exceeds inflation, consumers no longer face declining disposable income. Still, they are cutting back on buying high-priced ticket items. The weaker consumer is a catalyst for the Electric Vehicle Flop. Hertz (HTZ) announced on Jan. 12, 2024, that it would dump 100,000 Tesla (TSLA) EVs. This is already creating a glut of EVs in the used vehicle market. CarMax (KMX) and Carvana (CVNA) are increasingly unwilling to sell Tesla vehicles, fearing prices erode while they look for buyers. The falling prices will force Tesla to lower the prices of its vehicles, further creating deflationary pressures. 2/ Job Increases by Sector In April, the healthcare sector will likely add jobs. In March, the sector added 72,000 jobs. Economic activity in ambulatory health care services, hospitals, and nursing and residential care facilities thrived. That trend should continue as demand for health-related services increases. Readers should not mistake this strength as a signal to buy drug manufacturers. Highlighted for its weak share price, Bristol Myers (BMY) traded at a 52-week low after posting an unexpected $4.40 a share loss in the first quarter (non-GAAP). The firm has a substantial IPRD (In-Process Research and Development) impact of $6.30 a share against its EPS in 2024. Pfizer (PFE) is another struggling drug firm. Shares trade close to a 52-week low, with its dividend now yielding 6.55%. Readers may compare these two firms with Takeda (TAK), a Japanese firm. Its stock is near a one-year low. According to SA Analysts and the Quant Rating, Pfizer is a Buy. SA Analysts rate BMY stock a buy while Wall Street likes Takeda.   Seeking Alpha All three firms have high profitability grades. To sustain profit margins, they are unlikely to add staff. In the NFP report, expect the construction sector to add jobs. Jobs increased by 39,000 in March, nearly double the 19,000 monthly average gain over the prior 12 months. Watch Zillow Group (Z) and Redfin (RDFN), both of which are real estate services firms. In the homebuilding sector, watch Lennar (LEN), D.R. Horton (DHI), and Toll Brothers (TOL). All of the homebuilders are up nicely in the last year:   Seeking Alpha The quant grades suggest that real estate services will underperform. Elevated interest rates lift mortgage rates. This deters consumers from paying high borrowing costs. In the table below, both Z and RDFN stock score weak grades throughout.   Seeking Alpha DHI and LEN stock have better grades than TOL stock. After the government passed a $95 billion aid package to support Ukraine, Israel, and Taiwan, expect it to hire more staff. Investors seeking actionable stock picks from this spending may look at the aerospace and Defense sector. Consider firms like Lockheed Martin (LMT), RTX (RTX), and AeroVironment (AVAV). Avoid Boeing (BA) until it resolves its serious quality control issues.   Seeking Alpha Rising crude prices should lead to hiring in the energy sector. The oil and gas extraction industry showed little change in March. However, investors are accumulating energy stocks on the expectation that profit margins expand. Watch energy firms like Vistra (VST), EQT (EQT), Southern (SO), and APA (APA). All of these firms get a buy rating from analysts. Southern and Vistra are highly rated by sector rank, as shown below.   Seeking Alpha 3/ Job Decreases in April 2024 Expect jobs to fall in industries where customer demand shows signs of weakness. In March, jobs fell sequentially in beverages and tobacco. Although Altria (MO) stock rebounded, British American Tobacco (BTI) trended lower. Beverage firms Coca-Cola (KO) and PepsiCo (PEP) recently posted quarterly results. Their stock is trending higher. Both firms have strong brand value which enables them to sustain profit margin growth. Jobs declined in automotive parts and tire retailers. Consumers may hold off on buying new tires from Goodyear (GT). However, they may perform “do-it-yourself” repairs. That should help Advance Auto Parts (AAP) and Genuine Parts (GPC) outperform the automotive sector in the quarters ahead. Your Takeaway Markets are bracing for another healthy job market in April. It is yet another data point that supports the Federal Reserve’s stance on leaving interest rates alone. Investors who listened to the media about a rate cut pivot should have watched Treasury bond yields instead. The iShares 20+ Year Treasury Bond (TLT) is in a downtrend that started in Dec. 2023. The iShares 7-10 Year Treasury Bond ETF (IEF) is down 5.15% YTD, compared to 10.78% for the TLT ETF. Markets will effectively keep Treasury yields in the 5.0% range following the jobs report.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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