PHOENIX—Last Friday, the Bureau of Labor Statistics reported that the U.S. economy added 312,000 jobs in December 2018… far exceeding expectations of 184,000. Average hourly earnings also rose—increasing 0.4% over last month and 3.2% over last year.
In other words, U.S. companies hired 70% more workers than anticipated over the holiday season… And these workers got paid 3.2% more this past December than they did in the previous year.
While a 3.2% increase doesn’t sound like much, it’s the biggest increase since 2014… and 1% higher than the inflation rate.
So as a whole, America got a “real” inflation-adjusted pay raise last year.
Paul Ashworth, chief economist at research firm Capital Economics, may have put it best when he said, “The jump in payrolls in December would seem to make a mockery of market fears of an impending recession.”
He’s right… The actual numbers are quite a contrast to what we’ve seen lately in the market (more on that in a moment).
Predictions of a 2019 recession are coming in from all over the world. Talk of a “global slowdown” is spreading. Trade war fears, the threat of rising interest rates, and geopolitical uncertainty are all worrying investors.
We’ve seen these fears reflected in the market. It’s down 13% since its all-time highs in September 2018. And volatility is up 100% as measured by the Volatility Index (the VIX, or so-called “fear gauge”).
But as regular readers know, when people are working, it means the economy remains healthy—which is good news for equities.
In today’s essay, I’ll show you why all the doomsayers are wrong… and why the market pullback is a fire sale for quality companies.
The Numbers Don’t Show a Recession
Talk of a recession is way premature. And the numbers back me up…
As employees get paid more, they spend more, which grows the economy. It’s just common sense.
In fact, every recession since 1968 was preceded by a decrease in hiring—not an increase like we’re seeing today. (Recession periods are shaded.)
The same holds true for wage growth. Wage data doesn’t go as far back as hiring data, but you can see that wage growth trended lower before the 2008 recession…
However today, wage growth is increasing. If history holds true, the current economic expansion still has plenty of time left.
But you can’t look at just one indicator…. You’ll likely get some false alarms—like in 2017, when payroll growth slowed.
You have to look at several different indicators and put them together. That’s why I also follow bank credit growth.
When credit expands, new money is pumped into the economy, which then grows. Expanding credit is only a problem when people pay off debt while money leaves the economy.
As you can see in the chart below, credit growth curtailed sharply before past recessions. (Recession periods are shaded.)
Credit growth did dip a bit in 2015, which led to a 19% pullback in the market. But since then, the trend is up—another sign of strength.
I also follow housing starts. The housing sector is a major part of the economy; most people only buy new homes when times are good. And like the other indicators, housing starts are trending upward (recession periods are shaded):
As you can see, the numbers don’t suggest a recession is ahead. That’s why you have to tune out the noise and look at hard data.
If you just follow the headlines, you’ll sell when stocks are at their lowest (panic) and buy when they’re at their highest (mania).
At the Daily, we want to buy low and sell high. With investor sentiment running negative, stocks are trading at some of their lowest valuations in years. And buying stocks at a discount is how rational investors make money.
Fear Is Creating Buying Opportunities
Think of this current market pullback like a 20%-off sale at your favorite grocery store.
If your store had a 20% discount on every item, it’d be packed. (In Phoenix, WinCo has a 10%-off sale on everything the first Wednesday of each month; it’s a madhouse.)
There should be a rush to buy stocks now. You shouldn’t be scared. But remember, the market won’t recover in a straight line…
As PBRG guru Teeka Tiwari told me on Monday, it may take nine to 18 months before the market reaches news highs.
If that’s the case, consider using this current weakness to start building your positions now. Two good places to start are mid-caps and dividend-growing stocks.
Mid-caps are trading about 8% below their historical averages, making them one of the cheapest sectors in the market. If you want broad exposure to mid-caps, consider the iShares Core S&P Mid-Cap ETF (IJH). It’s the most liquid ETF in the sector.
And as misguided fear unsettles investors, they’ll flee to the safety of dividend growers. These are companies that pay dividends higher than the S&P 500’s average and increase their yields consistently.
As I told you on Wednesday, the Dogs of the Dow strategy buys the 10 highest-yielding stocks in the Dow Jones Industrial Average index at the beginning of the year—and holds them for the remainder of the year. You can get that list of stocks right here.
Analyst, The Palm Beach Daily
P.S. Have fear-inducing headlines kept you on the sidelines? Or are you taking advantage of the buying opportunity? Let us know right here…
From Earle I.: I’ve read reports that the January 24 launch of the Bakkt cryptocurrency exchange has been delayed again. Does Teeka know what caused this delay? Mahalo!
From Jimmie S.: I just read about an alleged 51% hack against the Ethereum Classic blockchain. The report said $500,000 in ETC had been double-spent. Is this true, and if so, what effect will it have on the crypto market?
Nick’s Reply: Great questions, guys. I’ll ask Teeka for the answers during our weekly interview on Monday. Stay tuned.
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