As earnings season kicks off today with Alcoa (AA) this afternoon, analysts' average earnings estimate for companies in the S&P 500 for the first quarter are now down to -5% year-over-year, which translates into a 2.7% drop in revenue. The last revenue decline for the S&P 500 was in the third quarter of 2012, which instigated another round of Fed quantitative easing and was the worst drop in revenue since the third quarter of 2009. Although we don't foresee another easing, we continue to believe that any tightening won't come until very late this year at the earliest.
Last year, the first quarter was severely marred by the "polar vortex," which was blamed for the 2.1% contraction in that quarter's gross domestic product. This year, the first quarter once again faced brutal weather, with the fifth-coldest March on record, coupled with import and export restrictions because of labor disputes at West Coast ports, on top of a drop in oil drilling. The Atlanta Federal Reserve has lowered its growth estimates for the first quarter from 1.9% just two months ago to 0.1%, essentially flat.
Friday's employment report was the worst in about two years, with the economy adding just 126,000 new jobs in March, which was well below the average estimate of 248,000. To add insult to injury, January and February numbers were also revised down by a total of 69,000 jobs. As if that wasn't bad enough, the average work week declined by 0.1 hours, and aggregate hours worked fell by 0.2%, two indicators that GDP may have contracted in March. Average hourly earnings rose by 2.1% on an annual basis, which is hardly something to get excited about and not exactly a sign of a job market that needs some cold water from the Fed. So much for relying on the experts this week as not one of the 98 forecasters on Bloomberg expected Friday's report to be so weak. The lowest estimate was 179,000, which was almost 50% above the actual number, and the highest was 300,000.
Yesterday's JOLT report (Job Openings and Labor Turnover Survey) provided an interesting additional view into the labor market, with job openings at 5.1 million at the end of February, which was little changed since January and the highest level since January 2001, up over 23% since January 2014. Labor demand rose the most in construction, leisure, retail trade and transportation. The labor-force participation rate in March stood at 62.7%. It has dropped fairly consistently during the past eight years and has kept us firmly at levels not seen since the late 1970s.
According to the U.S. Census Bureau, the population of the U.S. was 281.4 million in 2000. Today, the population is 320.6 million, an increase of almost 14%. During that time, the U.S. work force declined by almost 3.5% from 153.5 million to 148.3 million. That means that in 2000, 54.5% of the population was gainfully employed, but by 2015, that number had dropped to 46.3%. On top of that, 159.1 million (103.7% of the work force) is receiving some sort of government benefit such as Social Security, Medicare, food stamps or subsidized housing. Putting it all together, one could make the argument that one of the challenges facing the economy is a weakness in the available labor pool. Keep in mind the longer one remains out of the labor pool, the more rusty one's skill set becomes, a potential reason to pass over a job candidate. Investors would be wise to keep these ratios in mind when contemplating growth prospects for the economy. There is no quick fix to this situation given the aging population and level of entitlements. If you are in a self-imposed state of doubt on these figures, check them out here at USDebtClock.org, or as we call it, the scariest page on the Internet.
Today, we also learned that U.S. crude inventories rose by 10.9 million barrels, once again beating expectations and giving no sign that the decline in oil drilling in the U.S. is likely to change direction any time soon.
This morning, Family Dollar Stores (FDO), which is expecting to merge with Dollar Tree Stores (DLTR) in May, reported sales and profits in line with Wall Street expectations for a drop in profits from 80 cents a share to 67 cents a share, giving reason to believe that the post-crisis trend for a cash-strapped and price-conscious consumer remains. That trend, coupled with the population and jobs data we discussed earlier, bodes well for a company such as Cintas (CTAS), which rents, launders and services uniforms for the industries in which we see a preponderance of "help-wanted" ads, such as budget-conscious restaurants, personal-care aides and janitorial services.
We believe the better areas of focus for investors in the coming quarters will be those exposed more to U.S.-based revenue than to foreign-based revenue in light of the impact of the strong dollar and still weak international growth expectations. We like companies with those traits within consumer staples, consumer discretionary, technology and health care. With the markets likely to continue their choppy path, specific security selection will be increasingly important, as we are likely to see less correlation between and within sectors than in years past. Given the volatility, we expect, investors would be prudent to select stocks that will pay them for their patience, such as AT&T (T), which offers about a 5.7% dividend yield; Verizon Communications (VZ), with a 4.4% yield; and Seagate Technology (STX), with a 4% yield. Mixing the aging population and looking for higher-than-average dividend yields also means taking a closer look at Omega Healthcare Investors (OHI) and HCP (HCP) shares.
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