- John Blank, chief equity strategist at Zacks Investment Research, thinks you only need one indicator to identify a recession: the average monthly nonfarm payrolls run rate.
- Although the indicator is still in “OK” territory now, it’s been quickly deteriorating from peak 2018 levels.
- Blank also says the market has no “slack,” and describes how it’s created an investment landscape that’s one of the most difficult he’s ever seen.
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It’s safe to say that recession fears have been at the forefront of investor attention in 2019 — and it’s not without merit.
Since the beginning of the year, investors have had just about everything but the kitchen sink thrown at them — a yield curve inversion, declining PMIs, weakening earnings, the ongoing US-China trade war — you name it. Yet the S&P 500 has gained more than 20% year-to-date.
So are these fears overblown, or is it just a matter of time until a recession infiltrates the US economy? Deteriorating economic indicators say one thing, but stocks say another.
John Blank, chief equity strategist at Zacks Investment Research, thinks he has it figured out what to watch — and he’s relying on a metric he refers to as “the only investment indicator you need.”
That metric is the final, revised number of nonfarm payrolls.
The words “final” and “revised” are key here. That’s because the confidence interval for monthly changes in nonfarm payrolls is plus/minus 110,000 jobs, according to the Bureau of Labor Statistics. Not exactly peanuts in the grand scheme of things.
“You want the final, revised numbers to be above 125,000, and the economy then is in a steady state around 2% of growth,” he stated in an exclusive interview with Business Insider. “That’s the basic idea that I try to get across to people.”
His reasoning comes down to simple math.
“The civilian labor force in the US — people actually working — is roughly 150 million, and that grows at 1% a year,” he said. “That means you have 1.5 million workers entering the labor force every single year.”
Divide that 1.5 million workers by 12, and you arrive at 125,000 workers added per month. A number Blank refers to as “lukewarm.”
Anything below that 125,000 threshold spells trouble, while anything above 200,000 indicates an economy firing on all cylinders. Right now, it’s in “OK” territory, according to Blank. He expects it to come in around the year-to-date monthly average of 161,000 for October.
But this number has been deteriorating rapidly in 2019. Just a year prior, monthly employment gains averaged 223,000 — a 27% decline. It’s also hit some isolated rough patches, plummeting to just 62,000 in June.
That’s making the investment landscape increasingly difficult for Blank. The economy is in odd spot — neither hot nor cold — and due to this notion, he sees the market staying range bound unless payrolls change materially.
“So we’re having two rate cuts; we’re having effective introduction of QE by the Federal Reserve,” he said. “All of these things should stimulate the market, but there’s nothing in the way of slack to stimulate and bring into the economy.”
He continued: “Getting asset prices to tread water doesn’t create a stimulus, it just creates no downside. This has been the puzzle of why it’s been so tough to make money in this market.”
With that being said, Blank thinks it’s time to start building a watchlist — and at the top of his list are growth stocks in the healthcare and technology sectors.
However, he doesn’t suggest diving in with both feet “until the worm turns.”
For those investors looking to follow Blank’s suggestions, here are a pair of exchange-traded funds:
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