Despite some signs of improvement in the jobs outlook, investors might want to hold off on jumping into consumer stocks.
Normally, the more people who find work, the more money they'll have to spend on consumer goods. But the expected recovery in the services industry—which makes up the bulk of the US economy—is likely to be in lower-paying jobs rather than the high-end financial industry.
For that reason, market pros say investors shouldn't count on the consumer but look instead at companies with a broad international presence and strong exports.
"You've got to be real careful in investing in the bread-and-butter US company that relies on consumer demand," says David Twibell, managing director of investments for Colorado Capital Bank in Denver. "We still have a long way to go before most consumers feel like they are in a position to go out and spend."
Wall Street is wrestling with a week's worth of economic reports, much of which focus on the state of the jobs market. The early news wasn't particularly good: ADP reported Wednesday that while the loss of jobs in August was less than in July, it was still worse than most economists had anticipated.
That left investors in a quandary as they prepare for Thursday's weekly jobless claims report and Friday's monthly Labor Department reading. With the manufacturing sector still weakening and the services sector leading what is likely to be a tepid recovery, the safest place to put money for now probably will be multinational companies that can capitalize on global consumers' demands for US-produced goods.
"It's really a struggle for the consumer," says Kurt Karl, chief economist for Swiss Re in New York. "This is just not enough of a robust consumer recovery. We'll need to have much better than these types of unemployment drops to have the consumer feel more comfortable."
Owen Malcolm, chief operating officer at Sanders Financial Management in Atlanta, sees the employment trends as suggestive of a weak labor picture overall. His firm is invested largely in fixed income and is using covered-call option plays to reduce exposure to gyrations in the equities markets.
The traditional employment metrics don't examine the number of workers underemployed—those in part-time positions or in jobs for which they are overqualified—and therefore not providing a complete picture, he says.
"We don't have any kind of a bullish sentiment that all of a sudden people are going to start spending money again," Malcolm says. "Even if unemployment stabilizes we count other people who are underemployed and suffering and they're not going to be spending money like they did once upon a time.
That doesn't mean the Sanders firm is completely out of stocks. It finds some favor in multinationals but also cautions that consumers are generally weak globally.
Credit card companies also are likely to gain attention from the jobs numbers.
Should the figures show some improvement, that will be a boon to companies that are dependent on employment trends. The credit card space was one area that showed some optimism during Wednesday's trading, with Dow component American Express as well as MasterCard posting modest gains.
Consumer stock were broadly lower, though, with the Consumer Discretionary Sector SPDR exchange-traded fund edging into the red.
Investors will be looking closely not only at the unemployment rate and amount of jobs shed but also at the length of the work week, says Dave Lutz, managing director of trading for Stifel Nicolaus in Baltimore. Longer work weeks mean employers are asking current employees to work longer hours rather than approving new hires.
"People look at that as a very clean mechanism to watch," Lutz says.
The current recession is comparable to the 2001-2002 span, Lutz adds, when manufacturing took a brief move higher on dealer incentives but then turned negative when consumers couldn't spend anymore. That could spell more troubles for manufacturing stocks.
"Once all that demand was pulled forward, no matter what incentives they put forward it didn't incentivize anybody to go out and buy cars," he says. "They're afraid the same thing is happening now."
Indeed, the sentiment seems strong that the service sector is going to drive any jobs recovery, and that is likely to lead to volatility among stocks, says Michael Pento, chief economist for Delta Global Advisors.
Pento says the transfer of the US manufacturing base will be especially evident in the jobs picture, and will translate to prolonged consumer weakness.
"Is their spending power going to come from income growth? Not at all. All evidence is to the contrary. Real disposable income has been flat year over year as we continue to shed jobs," he says. "We're very far from a healthy economy and we're very far from having a substantiation of this market rally."