Job Market
The jobs report brought plenty of welcome news as the headline payrolls grew by 223,000 in the month of December, which easily topped the estimate of 200,000. This was a decrease from November's gain of 256,000, but it's important to remember that we've been discussing a deceleration in the jobs market for months now. Areas that remained hot included health care and social assistance at 74,400, leisure and hospitality at 67,000, and construction also grew by 28,000 jobs. Interestingly, Julia Pollack who is the chief economist at ZipRecruiter pointed out, “Health care has recovered to its pre-pandemic levels, but nowhere near its pre-pandemic trend, and hospitality is still not back to its pre-pandemic levels.” On the downside, information jobs saw a decline of 5,000 and professional and business services saw a decline of 6,000 jobs in the month. Overall, the unemployment rate fell back to 3.5%, which ties the lowest level since 1969. Part of this stems from the lower participation rate which currently stands at 62.3%, a full percentage point below where we were in February 2020 before the pandemic. Also, another measure of unemployment that takes into account discouraged workers and those holding part-time jobs for economic reasons also declined, falling to 6.5%. This is the lowest-ever reading in a data set that goes back to 1994. Probably the biggest market mover was the fact that wage inflation was up just 4.6% compared to the estimate of 5.0%.
Supply Management (ISM)
One survey that doesn't get a ton of media coverage is the Institute for Supply Management (ISM) non-manufacturing PMI. This is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The recent report showed a reading of 49.6 which missed the estimate of 55.0 and was down from 56.5 in November. This was the first time since May 2020 the reading was below 50. A reading below 50 indicates a contraction in the service economy. The area I thought stood out the most was new orders received by service businesses as they fell 45.2 from 56.0 in November and marked the lowest level since May 2020 and was the weakest reading since 2009, excluding the collapse during the pandemic. The reason this is so important is that Fed Chairman Powell is pointed to concerns over price increases in the service economy, but if the demand is not there it will be harder to raise prices. Hopefully they will take this into account at their next meeting.
Tech Employees
You have seen the headlines about all the laid off tech employees and may be thinking this is bad for the economy. What the media does not show you is the other side. A recent survey from ZipRecruiter shows that 79% of the laid off tech employees found a new job within three months. The job market remains strong, which I believe points to a recession that will be shorter and milder than other recessions.
Costco Stock (COST)
Costco is a very popular company and in 2021 the stock jump to over $550 per share. The stock has pulled back around 20% and some are saying this is a great buying opportunity. I have to question their thesis because the stock still trades around 29 times earnings, which is more than double the S&P 500. What concerns me is Costco‘s membership has grown at a 6% annual rate over the long term. I think that could be coming to an end and even growth at 5% while still good would cut the stock by at least 20%. You will see me from time to time in Costco shopping and picking up some items at a great price, but one item you won’t see me picking up is the stock itself until it comes down to a more reasonable level.
Green Energy
The United States is working very hard going green on everything. The obvious reason is to reduce air pollution, which makes a lot of sense. However, the United States is a very small part of the world, and the world apparently does not want to be as aggressive going to green energy as we are here in the United States. Global coal use reached a record in 2022 increasing by 1.2%. That surpasses a high reached back nine years ago in 2013.
Stock Market
Now that the books have closed on 2022, the final numbers show the S&P 500 fell 19.4% for the year and sits more than 20% below its record high. The Nasdaq fared even worse as it fell 33.1% for the year. While there still remain many questions about the economy and interest rates, historically stocks have done well following a losing year. In fact, the stock market, on average, rebounded by 15% in the next year following a year when it lost more than 1%. I am still looking forward to a bumpy year in 2023 but think we could see the stock market have a rebound in the high single digits come December 31st, 2023.
Special Purpose Acquisition Companies (SPACs)
Keeping you updated on the fall of SPACs, which are Special Purpose Acquisition Companies that we warned against when they were the talk of the town and investors wanted in. We warned against them and now some numbers are in that in December alone they have lost $600 million by liquidating over 70 of these blind pool investments. The full numbers for 2022 are not yet all in but at last count for the year they had lost over $1.1 billion. If you speculate, be prepared to lose principle.
Real Estate Investment Trusts (REITs)
REITs, also known as Real Estate Investment Trusts, are a very popular investment that generally have very generous yields. We have always favored traded REITs versus non-traded, and perhaps investors are becoming wiser. Withdraws from non-traded REITs in the third quarter were 12 times higher than one year earlier. There are a few good publicly traded REITs out there with decent yields but do your homework before blindly investing into a REIT just for the yield.
Labor Market
I may sound like a broken record, but until the labor market deteriorates, I do not see a brutal recession. In the recent Job Openings and Labor Turnover Survey (JOLTs) job openings stood at 10.46 million in November which was slightly lower than the previous month but surpassed the estimate of 10 million openings. This still means there are about 1.7 openings per available worker. I'm still looking for a recession this year, but I believe it will be a very mild one.
Lottery
The hype about the lottery is back again as talk of winning $1 billion makes the news. Keep in mind you don’t get that $1 billion unless you take it over 30 years. If the number gets you excited let me throw some water on that excitement and let you know that the odds of you winning the lottery are 1 in 302 million. To put that in perspective if you ever want to become president of United States, your odds are better coming in at 1 in 10 million. I don’t know of anyone that ever wanted to become an astronaut, but their odds are 1 in 12 million. Unfortunately, you have a much better chance of being in a plane crash as odds are 1 in 1 million. So, my financial recommendation, take the money you were going to use to buy a lottery ticket and put it in your 401(k) or your IRA. Sorry, but you’re not going to win the lottery.