Investors received a rude awakening on April 5, when the government released its March payroll data—and the outcome wasn’t good. U.S. employers added only 88,000 to the payrolls in March, representing the slowest pace of hiring in nine months. March hiring was well below expectations of 200,000 jobs, according to Reuters. The unemployment rate fell to 7.6%, but that has much more to do with the declining labor force participation rate than real job creation.
In fact, the labor force participation rate is at its lowest level since 1979. The March jobs data hit the markets like a ton of bricks, with the Dow Jones Industrial Average falling as much as 170 points in the immediate aftermath of the report. Investors might be asking themselves if this report is a sign that the markets are on the brink of another prolonged downturn, or whether this is an opportunity to buy the dip.
These stocks could use a pullback
Investors with an eye out for opportunities, who may have felt reluctant to allocate money to stocks in the midst of such a run-up, are likely hoping that the pullback continues. After all, if valuations come down, dividend yields will rise, and investors can buy their favorite stocks for better prices.
It’s fairly difficult to say that America’s blue chip stocks weren’t fully valued prior to the poor jobs report. Johnson & Johnson (NYSE:JNJ), The Coca-Cola Company (NYSE:KO), and The Clorox Company (NYSE:CLX) were all trading for more than 20 times their trailing earnings per share. In addition, whereas these stocks could have been had for dividend yields nearing 4% only months ago, investors could only secure 3% yields at recent prices.
Each of these stocks had very recently either breached or approached their all-time highs, and it’s not like they’ve been reporting gangbuster growth in their recent financial reports.
Johnson & Johnson (NYSE:JNJ) managed to grow diluted earnings per share by 10%, but saw only 3% revenue growth last year. The Coca-Cola Company (NYSE:KO) likewise grew revenue by 3%, and diluted EPS came in with 6.5% growth. The Clorox Company (NYSE:CLX), meanwhile, grew both revenue and diluted EPS by 4%. Considering that these stocks are some of America’s most mature companies operating in slow-growth industries, P/E ratios exceeding 20 don’t necessarily represent screaming bargains.
Wall street vs. main street
Investors need to remember the disconnect between the stock market and the broader economy. After all, the Dow Jones Industrial Average is only 30 of America’s large corporations. Corporate America has shown a remarkable ability to remain profitable and grow profits, even when so many real Americans are still struggling. If you think about it, there’s actually an explanation—part of the reason our nation’s biggest companies have reported resilient profits is because they’ve been laying people off.