February Jobs Report Review: Welcome To The Soft Landing, Kids (NYSEARCA:SPY)

The February jobs report came in ahead of expectations. The number of jobs gained exceeded consensus expectations significantly, the headline unemployment rate ticked up from 3.7%, where it had been stuck the last three months, to 3.9%. Overall, this was a very strong jobs report that exceeded expectations and showed that an employment driven recession is unlikely in the near future. In other words, the fabled soft landing is likely occurring despite a constant chorus of pessimistic and histrionic analysis that might lead you to believe otherwise. This discrepancy is an opportunity for alpha.

The January jobs report was incredibly strong and prompted renewed fears of inflation. It came at 353,000 jobs and showed remarkable strength, even though there may have been some seasonal noise that resulted in a higher figure. The revisions proved there was a lot of noise in this report, and actually that February added more jobs than the controversial January report (although future revisions may change this). Because of this, many economists have postulated that the February jobs report would provide a clearer picture of what is actually going on in the vital US labor market. If that’s the case, then it looks like the soft landing I have been talking about is occurring.

The expectations for February jobs were 198,000, but the number came in at a much more robust 275,000. The primary mechanism that acts to cause recession during Fed tightening cycle is carnage in the labor market. Yet, that carnage is not occurring, and this report shows it’s likely a ways off.

• The jobs market was much stronger than anticipated with notable strength in the Healthcare and Government sectors.
• Wage gains slowed more than consensus predicted and came in at 4.3% vs. 4.5% expected. What this means is that labor market strength is much less likely to renew inflationary pressure and the Fed has less of an obstacle to begin cutting rates.
• The relatively noisy January jobs report that showed 353,000 jobs added initially was revised down to 229,000. This again is positive for the Fed, and shows that the labor market is strong, while not strong enough to reignite problematic inflation.
• Overall, this report solidifies the position that a soft landing not only can occur, but is occurring right now. The odds for a Fed cut in June went up after the favorable report.

A few bulge brackets appeared to fear an impending slowdown in the jobs market and had expectations significantly lower than consensus. The humming engine of an exceptionally strong American economy continues to prove the pessimistic side of the analyst community wrong. The CME futures that imply the probability of a Fed rate cut showed a higher probability of one occurring in June after the February jobs report.

Many on Wall Street appear habitually pessimistic. This pessimism is your opportunity. Many are saying we’re in a bad economy or a recessionary environment, but this couldn’t be further from the truth. And the key to this economic strength is the continued strength in the labor market we saw this morning. While it may not be a politically convenient fact for a significant portion of our country, we’re experiencing the most robust jobs market in our recent history.

If Americans aren’t losing jobs hand over fist, but their pay isn’t rising at a rate that reignites inflation, then this is the exact “goldilocks” zone we need to be in for a soft-landing to occur. That seems to be exactly what’s occurring and this report will give Jay Powell a deserved bit of relief. It allows him to stick to the assessment of our proximity to rate cuts. Not far, as he told Congress in the past two days.

There’s an incentive for the pessimism as you can see above: it sells. This is not to imply that all bearish analysis is subject to this incentive, but as you can see above the net effect in media of pessimistic language is likely being felt in the investing world as well, in my estimation. We’re all only human. But the jobs market has been strong. That much is undeniable.

You have to be careful when interpreting analysis. There can be many chart crimes that make it seem like doom is impending, like I called out in my recent pre-earnings report on Nvidia (NVDA). However, it’s now undeniable that the scenario we described months ago as a soft landing is now coming to fruition. But the pessimism and the doomsday analysis persists, and it continues to show great traction with investors, both retail and institutional. So, use it as your asset. This jobs report is again confirmation that we are in a very strong economy that should persist in its strength for the immediate future, barring unexpected detrimental catalysts.

Risks and Where I Could Be Wrong

Just because we see economic strength today does not mean we will see it tomorrow. Of course, a recession will eventually come, and that’s as sure as anything can be in this world. Yet, Wall Street is at a decided disadvantage due to the massive economic interruption caused by COVID. Normally, the street is very good at outmaneuvering the crowd by better orienting itself in the economic cycle than its competition, but given the massive dislocations and shattered correlations from the greatest economic interruption in modern history, many of its old tricks are less effective.

Still, that doesn’t mean we don’t live in a volatile world. We do. There are a number of risks that are stalking this market, and despite fundamental justification for much of this rally, a market at these high levels would certainly be vulnerable to unforeseen risks. While I can’t predict what these risks might be, if they occur, better than anyone else. I think these unresolved risks below might be prime candidates for knocking the market into a correction.

• Monetary policy lag and QT cause a rapid reversal of economic conditions.
• Debt-strapped companies start to buckle under the weight of higher rates, causing higher unemployment than predicted by the SEP.
• Inflation returns.
• Fed policy error.
• Escalation of geopolitical tensions.
• OPEC.

But even if there is a correction, I do suspect it will be a buying opportunity. One of the other effects of the economic devastation of COVID is that it creates hardy and resilient corporate entities that are much better suited to weather economic stress than the entities that came before the pandemic. Repeated earnings strength has proven this fact, and I think there are many indicators that this bull market has room to run.

Conclusion

When you look at the deck of an aircraft carrier, and you comprehend how fast and large the fighter jets that have to land on them are, it can seem like an impossible task. Your judgment isn’t wholly off here. Without the magic of countervailing forces to assist in the take-off and landing, many of the aircraft wouldn’t be able to be used. There are cables that grab the plane and help mitigate its force to help it land.

This is a brilliant metaphor for what’s happening in our economy right now, I think. Government spending is a major source of persistent economic strength. There are few ways that governments can affect the economy as they intend, reliably over certain time periods. But pumping hundreds of billions or trillions into the economy will help life tides in the short term. You can see this strength in the government jobs. And the CHIPS Act and Build Back Better are also injecting capital into an American economy.

But the economic strength we are currently experiencing is undeniable. Expectations for inflation remain manageable, and consumers are beginning to feel more optimistic about the economy. Furthermore, I think the work of Dr. Alan Blinder will prove prescient in its conclusion that soft landing are more frequent than consensus affords. Welcome to the soft landing, kids. Invest accordingly.