Why A Bad Labor Report Is Good For Investors

According to the latest JOLTS report published by the Bureau of Labor Statistics yesterday, job openings in the U.S. declined to 8.06 million in April from 8.35 million in March. Economists polled by FactSet were expecting April job openings to total 8.36 million, which suggests the labor market is cooling faster than initial expectations of economists. Diving deeper, the level of job openings in April suggests there were an estimated 1.2 jobs available for every job seeker during April, which is the lowest ratio registered since June 2021. Granular data reveals more signs of a stabilizing job market. For example, voluntary separations remained steady at 2.2% while layoffs reached the lowest level since December 2022.

Disparate Data Points The Way Forward 

The strength of the labor market has a direct relationship with the level of inflation as strong employment growth often leads to higher inflation. The Phillips Curve theory, which explains the inverse relationship between unemployment and inflation, explains how low unemployment leads to higher wages, which can push inflation higher for two reasons - higher consumer spending and companies passing increased labor costs to consumers.

When inflation surges past the FOMC’s target range of around 2%, monetary policymakers are forced to implement contractionary policies to control economic growth and inflation. Amid strong job growth and 30-year high inflation, the Fed hiked rates 11 times between March 2022 and July 2023 from a range of 0.25%-0.5% to 5.25%-5.5%. Since then, rates have been kept steady as the Fed has been waiting for the rate cuts to have their full effect. These rate cuts have led to an erosion in the market value of some high-flying pandemic darlings, especially tech companies that benefited from the zero-interest-rate environment.

According to Oxford Economics’ lead U.S. economist Nancy Vanden, the meaningful decline in job openings in April points to a slower pace of hiring in the foreseeable future, which is likely to lead to rate cuts sooner rather than later. A reversal of the Fed’s stance will give a boost to stock prices, especially rate-sensitive stocks.

How Investors Can Profit Based On This Information

To profit from a continued slowdown in inflation and a potential rate cut, investors should focus on rate-sensitive sectors. Strategically investing in REITs may help traders in the coming months given that the real estate sector is highly sensitive to changes in mortgage rates. The lower the rates, the higher the demand for houses and commercial properties. Ventas, Inc. (VTR), Camden Property Trust (CPT), and Crown Castle Inc. (CCI) are a few REITs that seem well-positioned to benefit from lower rates.

The utilities sector is also poised to emerge as a big winner in cooling inflation and decreasing interest rates. Utility businesses such as electricity companies and renewable energy companies are highly capital-intensive as they invest large amounts of money to fund future projects. These investment projects are often carried out with substantial debt, and low interest rates enable these companies to save interest costs and aggressively invest for the future. NextEra Energy (NEE) and The Southern Company (SO) are two stocks investors may want to consider given cooling inflation.

Neither Dilantha Desilva nor Stocks.News have positions in the stocks listed in this article. Please see our disclosure page for more information.