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  1. Home
  2. / Investing
  3. / U.S. Equity

Take Advantage of This Selloff

Wage growth is rising and some GDP forecasts are being upped, so now is the time to buy this "blood in the streets."
By MARCO MAZZOCCO Feb 08, 2016 | 11:30 AM EST
Stocks quotes in this article: KO, DIS

"Buy when there's blood in the streets, even if the blood is your own." This is the original quote from Baron Rothschild, an 18th century British nobleman, in reference to taking advantage of panic-stricken times. And nothing could be more fitting to the carnage that took place in equities last week.

The S&P 500 finished down almost 2% on Friday alone, giving up a tad over 3% for the week, and is now resting on its short term support level of 1880. At the end of the proverbial day, lower stock prices are lower stock prices, but the reason why they are lower makes all the difference.

Unfortunately, there are many potential candidates for what caused the selloff last week, ranging from a strong dollar to hedge fund liquidations to sovereign wealth funds selling assets. The truth is probably some combination of all of those things, along with something else that we may not even be aware of yet. However the good news in all of this is that the element that ultimately determines the fate of U.S. equity prices -- the economy -- is indeed doing well. That's what makes this selloff the kind you want to take advantage of. 

We got a great read on the economy with Friday's nonfarm payroll report. The foundation of a consumption-based economy, like the U.S., is employment. Without a healthy labor market, everything else falls apart. Until Friday, we knew that overall employment was strong, but that wage growth was not picking up the way we expected. So finally, in the payroll data we got Friday morning, there was confirmation that wages are indeed picking up. Average hourly earnings (AHE) for January were up 2.5% over the previous year, with December being revised up to 2.7%. To put that in perspective, the average gain for 2015 was just 2.3%.

Full Employment: Average Hourly Earnings Vs. Continuing Claims

That said, based on historical relationships with wages and employment, we should see an acceleration in wage growth going forward. Basically, the economy reached full employment several months ago and we are now seeing wages rise as employers are forced to pay more to keep workers. This change in labor-force dynamics brings one of Fed chairperson Yellen's favorite labor reports, the Job Opening and Labor Turnover Survey (JOLTS), front and center. One of the components of JOLTS, the quits rate, represents "voluntary separations initiated by the employee." As you can see in the graph, below, the historical relationship between quits and AHE indicates that we should see a significant gap up in wage growth. 

This makes sense, as a higher quits rate shows leverage shifting to workers. We'll be getting December JOLTS data on Tuesday, so although we'll be looking backwards, it is the historical relationship that counts. Given the rise in AHE, we should see a higher quits rate.

Already, we are seeing the significance of AHE gains as the Atlanta Federal Reserve Bank has raised their consumption projections in the GDP Now forecast. Because of the jump in AHE, the Atlanta Fed upped its forecasts for first-quarter 2016 GDP from a 0.4% decline and consumer spending from a 2.5% rise all the way to 2.1% and 3%, respectively. This demonstrates how important gains in AHE are for consumption figures -- and by default, Fed policy going forward. 

We did a get a bit of disappointing news this past week, with the January  ISM Non-Manufacturing (NMI) report coming in lower from last month -- down to 53.5. The current reading is still well in expansionary territory: As defined by ISM, anything above 48.9 indicates economic expansion. The commentary in the NMI survey definitely showed that the equity selloff in January affected responses. That being said, we should see a bounce back in February as markets stabilize. But if the NMI continues to drift lower, then there will be more cause for concern. Given the labor-market backdrop, I expect that things will be fine. 

Here we are entering a new week with earnings coming from consumer favorites -- Coca-Cola (KO) and Disney (DIS), just to name a couple. On the economic-data front, we get a personal favorite of mine -- the NFIB Small Business optimism Index -- along with JOLTS, weekly claims and retail sales to finish up on Friday. There were some rumblings over the weekend of Venezuela and OPEC reaching some kind of an agreement that will hopefully stabilize oil. If that happens, the bleeding should stop, and we might actually get a look at what equities can trade like based on good economic news and solid corporate earnings. So let's stay focused on the data -- and do some extra homework with the free time we now have since football season is over.

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At the time of publication, Mazzocco had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity

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