Every trader who has been looking for signs that the economy is improving got it this morning in the payroll report published by the Labor Department. The economy created 243,000 jobs, as factory jobs grew by the most in a year. The gain in overall employment was the largest since April, and exceeded economists' expectations for a rise of only 150,000. What does this report mean for traders?
Unless the government comes with downward revisions, this report is a game-changer that requires portfolio re-balancing. Here are four trades to consider:
1. Buy Homebuilders. A good employment report is very bullish for homebuilders, as it increases the likelihood of people buying homes. Besides, economic fundamentals for the industry have been improving: New home inventories are declining; homebuilder confidence is improving; home prices are stabilizing; and industry leaders like Toll Brothers (NYSE:TOL) have been reporting better-than-expected earnings results. Conservative investors may want to buy an ETF investing in homebuilder stocks like SPDR Homebuilders (NYSEARCA:XHB) and Ishares Dow Jones Home Builders (NYSEARCA:ITB), or buy the shares of diverse homebuilders like D.R.Horton (NYSE:DHI). Aggressive investors may want to accumulate the shares of individual homebuilders that have been taking steps to address the housing crisis early, like Lennar Corporation (NYSE:LEN), Toll Brothers, Standard Pacific (SPF), and Honvanian Enterprise (NYSE:HOV) - though due diligence is recommended.
2. Buy Cyclical Stocks. An improving job picture is good news for cyclical stocks like Ford (F), General Motors (GM), Toyota Motor Company (TM), and Honda Motor Company (HMC), Nike (NKE) and Coach (COH).
3. Avoid High-flying energy Materials and Precious Metals. A strong employment report diminishes the prospect of further QE by the Fed. This is certainly bad news for high-fliers in the materials and energy space like Walter Energy (NYSE:WLT), Cliffs Natural Resources (NYSE:CLF), Oil Service Holders (NYSEARCA:OIH), Ishares silver trust (SLV), SPDR Gold Shares (NYSEARCA:GLD) (up 100 percent) and Freeport-McMoRan Copper and Gold (FCX).
4. Avoid non-cyclical stocks. These stocks fare better during a declining rather than expanding economy like big pharma stocks - Pfizer (NYSE:PFE), Bristol-Myers Squibb (NYSE:BMY), Abbott Laboratories (NYSE:ABT), Eli Lilly (NYSE:LLY) and Merck (NYSE:MRK) - that enjoy hefty profit margins, ranging from 19% to 32%; and pay hefty dividends, ranging from 3.80% to 5.5%, compared with 1.88% for S&P 500 stocks (NYSEARCA:SPY).
5. Stay with bellwether stocks like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Microsoft (MSFT) with dominant market positions that are well-position to benefit from a rebound in consumer spending.