The US consumer is back! Cyber Monday is reportedly breaking all records this year. Early estimates by IBM (IBM) suggest around $2 Billion in online sales, a 20% increase year over year. Finally it seems the engine that drives the US recovery is revving up and everything in the garden is rosy!
I don’t want to be a party pooper, but it seems to me that there is one piece of the puzzle missing…jobs. U.S. unemployment is still over 7%, a level that not too long ago would have been deemed disastrous. There are signs of a gradual improvement in the numbers, but there is evidence that the drop in the unemployment rate is at least partially a function of people leaving the workforce. That trend is expected to continue this Friday with the release of November jobs numbers. Analysts are forecasting a fall in Non-Farm Payrolls to around 185k, and a simultaneous drop in the unemployment rate to 7.2%.
As is often a case with economic data, this drop in the labor participation rate has become intensely politicized. I am not interested in the political debate. It is logical that as baby boomers approach retirement age, a larger number of people stop looking for full time work. How much better or worse this would be if one or the other party was in power is irrelevant, the fact is that it is happening.
In a world of increasing automation and globalization, it is hard to see a major boost to the employment situation coming any time soon. If anything, the pressure is likely to increase; drone deliveries and driverless cars don’t bode too well for delivery drivers, for example.
So, it seems, we live in a time when even increasing economic activity and more money in the economy struggle to move the needle on jobs numbers…just ask the Fed. There is, however, one area of the employment data that shows consistent growth…part-time work. Again, I’m not interested in the politics of this. You can blame Obamacare, or ruthless corporations taking advantage of desperate young people, or old people with reduced retirement funds or whatever you like. In fact, according to a study by The Federal Reserve Bank of San Francisco, the level of part time employees is within the normal parameters for a period of economic recovery, so the political arguments are probably just hot air. What is important is that it is happening
As I look at all of this data and assess employment trends and underlying pressure, my trader’s mind has only one question; how do I trade my opinion? To that end I have been looking at two much traded stocks that are directly concerned with the employment situation, Manpower (MAN) and Paychex (PAYX).
1 Year Charts For Manpower (Lft) and Paychex (Rght.) Charts Courtesy of VectorVest
As you can see, and as you would expect, MAN and PAYX have followed a similar path this year, a path that can be summed up in one word, “up”. I believe, however that their fortunes are about to diverge. MAN looks like a decent buy, even here, but PAYX looks overvalued. Both have benefited from predictions of growth that assume that, as the economy improves, so will the employment market. That, as I pointed out earlier and in the words of the old song, ain’t necessarily so. It is quite possible that the slow economic recovery could continue or accelerate with what little impact there is on employment being soaked up by baby boomers taking part time jobs.
One could argue that Manpower, as a temp agency, is better placed to take advantage of an increase in part time employment, and that is a part of the reason I prefer that stock, but only a small part. It is more to do with what has driven each stock higher this year. Manpower is coming off of a bad year in 2012, and owes much of its appreciation to improved performance, whereas Paychex advances are more to do with the anticipation of an improving market.
PAYX’ EPS has increased by an average of under 2.5% in the last 2 quarters and the stock is up over 34% in the last year. MAN, by comparison, has gained over 105%, but has seen an average EPS increase of over 60% in their last two releases. Of course this sample is small and there are other factors at play, but it does illustrate that, while MAN has gone further, the appreciation there is based on actual results, rather than just expectations of a growing market. Forward P/E numbers further support the argument that the gains in MAN (P/E 17.49) are justified, while PAYX (P/E 25.79) is beginning to look a little overbought.
Friday will see a release of fresh jobs data, and as always, the eyes of the market will be fixed on those numbers. If recent history and analysts estimates are to be believed, it is likely that the detailed report will once again show a slight decrease in the actual unemployment rate and a drop in the participation rate. Both MAN and PAYX will react to those numbers. To guard against any shock there, I would prefer a pure play on the relative strength of each stock, rather than a bet on the fortunes of one or the other. Thus shorting PAYX through options, futures or cash and then using the funds to establish a long position in MAN would be my favored trade.
Whether you trade employment directly through the above mentioned stocks or more indirectly through general market exposure, though, avoid thinking that, just because the US consumer is back to spending on Cyber Monday, the jobs situation will improve dramatically. There are other, structural factors at play that could continue to pressure the labor market for years to come and some will undoubtedly come out of that better than others.