Given the urgency of the matter – and also because I missed my usual Wednesday report last week – I decided to issue an article for Sunday morning. Fundamentally, the official June jobs report may end up representing the beginning of a pivot away from a tight labor market to one that is conspicuously looser. If so, investors will want to consider positioning themselves in two soon-to-be relevant business services stocks.
On paper, last Friday’s jobs data showed that U.S. employers added 209,000 new opportunities last month. Notably, this tally represented a slowdown from May’s robust hiring of 306,000. Also, analysts had anticipated that the economy added 240,000 new jobs. Put another way, the headline print demonstrated that while labor force sentiment remained robust, the pace of growth appeared to decelerate.
Fundamentally, a measured deceleration would align with the Federal Reserve’s efforts to spark gentle disinflation; that is, a reduced rate of rising consumer prices without sparking a recession. On the surface, a gradual, controlled bleeding of the labor market’s intense velocity should also convince monetary policymakers to not implement benchmark interest rate hikes.
However, as Barchart contributor Rich Asplund noted, Wall Street slid on Friday following the June payroll report. Likely, the main culprit centers on the Fed and the rising possibility of rate hikes.
A Hawkish Fed Isn’t Out of the Question
According to a recent AP report, some Fed officials wanted to raise the central bank’s key interest rate by one-quarter of a percentage point at their meeting last month. Primarily, these policymakers wanted to intensify their battle against stubbornly high inflation. Of course, the Fed ultimately decided to forgo a rate hike. Still, abstaining from the imposition of higher borrowing costs might not be a realistic option later this month.
Significantly, the minutes of the June 13-14 meeting demonstrated growing division among central bankers about how to manage consumer prices that have soared well above pre-pandemic norms. And while some analysts see the latest jobs print as a Goldilocks report – not too hot, not too cold – in reality, the data might indeed be too hot for the Fed.
Again, the headline number may have declined. However, investors must also consider two factors. First, the unemployment rate declined ever so slightly to 3.6% in June from 3.7% in May. Second, the average hourly earnings statistic increased by 0.4% in June. Further, the government revised May’s wage growth data to the same rate. Put another way, the pace of rising wages has been steady and elevated.
Taken as a whole, the Fed is still wrestling with a framework that it actively sought to mitigate: more dollars (through increased employment) are chasing after fewer goods (depleted because of rising competition). Naturally, this is a classic inflationary setup, one that the Fed must get a hold of.
However, accomplishing the aforementioned task necessarily involves slowing the labor market. And that bodes well for two staffing agencies: Robert Half International (RHI) and Kelly Services (KELYA).
Pivoting into Relevance
Throughout most of the year so far, the resilient labor market imposed relevancy obstacles to enterprises like Robert Half and Kelly Services. Under a tight jobs market, openings are plentiful in large part because employers have difficulty finding candidates. Therefore, if jobseekers are willing to put even modest effort into their search, it doesn’t make much sense to seek out staffing agencies.
Mainly, that’s because by the nature of the industry, staffing firms fleece the flock. By connecting employers with qualified prospective candidates, these enterprises take a cut. However, neither employer nor jobseeker really needs such middlemen entities in a tight market. The former can simply dangle higher wages while the latter just needs to fill out applications.
However, if the Fed raises rates and continues to implement hawkish policies, this course of action could change everything. At that point, higher borrowing costs would crimp various companies’ expansionary strategies. As a result, they would have to engage in mass layoffs to align with new economic realities.
Stated differently, the labor market would become slack. As well, rising desperation may hit the space as jobseekers take longer to find work.
Therefore, entities like Robert Half and Kelly Services – though they don’t look impressive right now – may be on the cusp of pivoting into relevance. Further, because these two stocks have been underappreciated for so long (and for good reason, admittedly), they’re sitting on a compelling discount.
At time of writing, RHI trades at a forward multiple of 16.72. On the other hand, KELYA trades at a forward multiple of 11.55. Compare that to the forward price-earnings ratio of the underlying business and consumer services sector of 21.37 times and you can see that both companies trade at a comparative discount.
True, sales recently have been weak for both Robert Half and Kelly Services. However, their first quarter numbers reflected a tight labor market getting tighter. Moving forward, maybe not in Q2 but perhaps in Q3 or Q4, revenue may rise due to increased demand.
Of course, the optimism centers on the Fed raising rates. For speculators anticipating higher borrowing costs, RHI and KELYA would be difficult opportunities to pass up.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
