Jobs report a ‘fairytale scenario’ for markets, economist says

Michele Schneider, Marketgauge.com Partner and Director of Trading Research & Education; Kevin Paffrath, Financial Analyst & YouTuber "Meet Kevin"; and Julia Pollak, ZipRecruiter Chief Economist weigh in on the January jobs report and what it means for investors.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: All right, well, let's talk about this massive jobs report because it obliterated expectations, US adding 517,000 jobs in the first month of the year, unemployment dropping to 3.4%. Putting that in perspective, it's the lowest level that we have seen in over 50 years. So we're going to take a look at this jobs report from three different angles. We've got the economy, the markets, and what it means for your portfolio.

For that, we want to bring in Michele Schneider, MarketGauge.com Partner, Julia Pollak, ZipRecruiter Chief Economist, and we have Kevin Paffrath, a Financial Analyst and "Meet Kevin" on YouTube. Great to have all three of you. Julia, let me start with you because we're trying to figure out what exactly this massive report means for the Fed, the implications there. What do you think?

JULIA POLLAK: So the Fed's projection is that these massive interest rate hikes would cause unemployment to go up to 4.6% in 2023, right? So typically, raising interest rates is necessary to bring down inflation, but it comes at a cost. And that cost is rising unemployment. What we got in this report was like the fairy tale scenario of falling unemployment and falling inflation. It's almost too good to be true, like $20 bills on the sidewalk or like a free lunch.

JARED BLIKRE: Michele, I got to ask you, I was talking about the disconnect between the fundamentals and the technicals. We have so many markets and major indices breaking to the upside. 200-day moving averages are a thing of the past, it seems, all in the rear view mirror. Of course, that can change very quickly. I'm just wondering what you're making of this huge week of news?

MICHELE SCHNEIDER: Well, there's an expression that I started out in my outlook 2023 with, which is you can't run with the hares and hunt with the hounds. And that may be the perfect expression to describe exactly what we're seeing in terms of the disconnect. As far as the technicals right now, let's go time frame. Absolutely on a daily frame and even on a weekly frame, we've blown over the moving averages, and we have golden crosses in three of the four indices.

But if you look at the monthly chart, which is what I'm really focused on here, we're just proving right now to be somewhat in a wide trading range with 4,200 SPX where the 23-month moving average comes in. In NASDAQ, it's a little higher. It's at 330. And in the Russell 2000, it comes in at around 202 if we're looking at IWM.

So I still think, given this disconnect and everything that I just heard Julia say, plus there's so much other things to unpack in that labor report, labor participation, JOLTS, et cetera, is that we could just be in for a giant trading range. And that could be 4,200 to 3,200, maybe go to 4,300. So I'm not expecting much more than that at this point.

DAVID BRIGGS: Kevin, you read this report with a bit of suspicion. Why?

KEVIN PAFFRATH: Yeah. Look, hey, when I first got the report, I was blown away because I thought, uh-oh, this is terrible. But I actually read it with a little bit of a contrarian suspicion that maybe these January to January adjustments are just seasonal adjustments. And really what we've got to look at is, as Jerome Powell has taught us, one report does not make a trend. And absent a black swan, I think we're slow up from here.

I actually think now's the time to add. The market has a chance of exploding to the upside. Once we get that consistent, solid data, that wage-price spiral isn't here. And we got to listen to Jerome Powell when he tells us he sees a substantially lower risk of a wage-price spiral. The ECI report came in weak. And it's very clear that wage gains are falling.

We're just gaining at an annualized rate of 3.6% on wages now from the report this morning. So look, I think Julia is right when she says we're in kind of a fairy tale, and we should be pinching ourselves, adding right now to our portfolios. And we might be Nike swoosh recovering from here. Hopefully, we break out of this trading range that we just heard about as well, and it's up from here.

DAVID BRIGGS: But you do trust this number, Kevin?

KEVIN PAFFRATH: Look, these month-to-month fluctuations we get from the Bureau of Labor Statistic, I really don't trust so terribly because the reality is you've got this household data versus the payrolls report, where the surveyors are asking people at home, hey, are you working, and they're getting single counted, whereas is the establishment number is double counting because they're calling businesses.

So you've got a lot of part-time workers helping boost this number right now. In fact, Zero Hedge just put out a piece that if you look since March, we've only added 10,000 actual jobs because most of them are part-time jobs. So that's 10,000 full-time jobs when I say actual jobs versus part-time jobs.

So it's a sign that, look, the economy's tough. People are getting a second, maybe even a third job to increase their income, get through some of the high prices we've seen. But as long as the prices, which are high, don't keep rising, the Fed does not have to force a recession. And that's the most important issue here is the Fed forcing a recession.

If the Fed goes away and relaxes, they do not have to cause a recession. After all, you mentioned MacroAlf. He's pretty active on Twitter. I think he's stuck as a bear. I think he's got to wake up and realize that the Fed does not actually want people to lose their jobs. If we can get rid of inflation without people losing their jobs, we go to the fairy tale scenario Julia just talked about, and the MacroAlf is going to be very sad he didn't go long.

SEANA SMITH: So the fairy tale scenario, Julia, you said it's almost too good to be true. When we are looking at this number, I want to ask you just about the measurement issues. Are there potential measurement issues here when you take into account the difficulty of adjusting for seasonality at this point?

JULIA POLLAK: So a lot of things happened in this report. We got population adjustments. We got benchmark revisions. We got the huge seasonal adjustment that always takes place in January. And yet, even factoring in all of those changes, this is still a remarkably strong report.

And not only that, it's consistent with many of the other indicators that came out this week. We had the JOLTS report earlier in the week showing us job openings rising. We also had the ISM Services Index this week, which had fallen in December into contractionary territory, jump back up into expansionary territory.

So there's a lot of good news here. And then there are other indicators that suggest that this may actually be sustainable, that we could possibly see strong job growth and solid but moderating wage growth without inflation because productivity is picking up again and because participation, while only slowly recovering, is steadily recovering.

JARED BLIKRE: Michele, I want to direct everybody's attention to the YFi Interactive, and this is about commodities. Not sure if you can see this, but I think you're going to get the gist as I go along here. Crude oil down 4.8% for the year.

Here's a two-year chart right down-- right down back towards its lows here from late last year. Just wondering, if we have China opening up here, if we have all these bullish factors, is there some kind of a disconnect between what we're seeing in the futures market here, especially with crude oil, maybe copper as well, and stocks surging higher?

MICHELE SCHNEIDER: Well, I'm so glad that you asked me this question, Jared. And if is a word that I've heard a lot in the last few minutes. And so I think the biggest if is if inflation has indeed peaked. And right now, if we look at what's happening, even just today, yes, we have seen obviously gold and silver come off a lot from its recent high because the dollar got stronger and because we're back to the fear of the Fed being aggressive again, but we actually are still really up considering where we were just a couple of months ago in both the precious metals.

Steel is actually up on the day. The food commodities have softened from their weekly highs, but sugar has exploded over $0.21 a pound. Coffee took a rise. We have so many other X factors that can turn that fairy dust into cement, and that would be a lot of the geopolitical problems we have, weather problems, food shortages.

And the wages not necessarily keeping up with inflation has already led to social unrest in places like the UK and in France, and that could proceed if, if, if inflation actually-- what we believe could very well happen-- rears its ugly head again. And even in the energy market, I wouldn't get too complacent that inflation is over because when you have inflation over 8% statistically, it takes time for that to reverse.

DAVID BRIGGS: All right, want to close it out with you, Kevin. We've had a big week in tech from earnings yesterday, from the Fed hike on Wednesday. Single biggest takeaway for big tech on this week?

KEVIN PAFFRATH: Absolutely. Biggest takeaway for big tech is absolutely focus on free cash flow. These are the companies that are going to get you through 2023. Just look at bill.com. That is a company-- that is a software as a services company with weak, weak cash flow numbers, and we got a big, big, big miss. It doesn't take much for software as a services to drop 25%, especially when you're not profitable or you have a sustained cash flow.

So I'm looking for a combination of both-- profit and high free cash flow. If I can get both of those together-- and I'm seeing a lot of that in hardware, chips, Taiwan semiconductors, ASML, Tesla, Enphase, SolarEdge, although some risk potentially from low residential investments-- those are the investments I think are going to bring you through 2023.

So I have a little bit of a risk and a little bit of a bone to pick with Cathie Wood focusing a little too heavily on profitless because I think they're going to have to raise too much money, and those are going to lead to some big adjustments down in stock prices. But otherwise, very optimistic on tech that is profitable and high free cash flow.

DAVID BRIGGS: All right, got to leave it there. Kevin, Julia, Michele, thank you all. Really appreciate the conversation.