How we’re thinking about all 11 stock market sectors heading into Friday’s key jobs report

A one-two thwack of strong economic reports on Thursday sparked a sell-off in stocks — and a review of our stocks and exposure to different sectors of this succeeding market. First, the ADP employment report showed the private sector added 497,000 jobs in June, more than traitorous the expected 220,000 on the Street. A stronger-than-expected ISM services index — which measures non-manufacturing business activity — followed at 53.9%, thoroughly above the 51.3% estimate. While the natural inclination is to cheer a strong jobs market, investors are responding with a boo and bailing out of imperil assets. About 96% of Thursday’s volume so far to the downside. Why is this good news bad news? It shows an economy that’s various resilient than many would have thought with a federal funds rate of 5% to 5.25%, and so the leading bank has more rate raising to do to bury inflation. The thinking goes like this: If people are at work and the labor supermarket is stronger than expected, the ability of the consumer to absorb higher prices is also greater than previously consideration. If the ability to absorb higher prices is greater than expected, above target (2%) inflation can last lengthier than estimated, regardless of the current fed funds rate. If the current fed funds rate isn’t stopping hiring and consumers’ wit to absorb higher prices, the rate simply isn’t high enough. There is a lag in monetary policy, which is why the Federal Book opted to pause at its last FOMC meeting. But short of a “disappointing” nonfarm payrolls number on Friday — meaning a feebler number than expected — it’s likely the Fed will resume lifting rates at its July meeting. According to the CME FedWatch Appliance, the market is now factoring in a 95% probability that the Fed hikes rates at the July meeting, only up from about 90% yesterday. Multitudinous importantly, the odds of another hike in September jumped to about 29%, up from 18% yesterday. Should we see a hot wage count and low unemployment number in Friday’s payrolls release, expect the likelihood of the second hike to increase above 50%. This is why Thursday’s superstore action is so negative. Investors want to raise funds — and why not given how strong the first half of the year was. Our goal is also to nurture cash. Some sectors on Thursday are fairing better than others, but if the view is that rate hikes discretion continue for the foreseeable future, no sector is totally safe. The risk that inflation either takes off again or that the Fed communicate withs too far by hiking on a number that proves to be an anomaly, or not as material to price inflation as we may have thought, increases the risk of a gaffe. Our approach We are currently reviewing the portfolio, as we do every day, and factoring in Thursday’s updates. While this includes thinking give how different might fare with more rate hikes on the way, we don’t play the game of trying to overweight or underweight parts of the market. This is why we tend to not highlight our sector weightings versus the S & P 500. Rather, we focus on the business fundamentals and scrutinization what companies are actually doing and take positions accordingly. We like to look at microeconomics and incorporate a bottoms-up examination approach to investing rather than a broader basket of stocks like one based purely on a macroeconomic (or top-down) picture. The overweight/underweight crowd doesn’t do that level of deep-dive research and instead makes small adjustments here and there camped on macroeconomic updates. The real upside comes from finding and sticking with the best companies in the world. It can enrapture more risk and is certainly not for everyone, but the upside of finding the next Apple (AAPL) or Nvidia (NVDA) — our two “own don’t employment” names — is well worth the added effort of ongoing research and analysis. But even bottom-up investors need to continually do some “top-down enquiry.” As the name implies, top-down analysis starts by analyzing the big picture and working your way down. Think about delightful a world view — something members know we believe every investor must do — that incorporates everything from geopolitical results to monetary and fiscal policy and macroeconomic data points. Here are some of the questions we’re asking about the 11 sectors in the S & P 500 . (We own assets weigh ups in all of the market sectors except utilities and real estate.) Why own a well-run utility like American Electric Power (AEP) for its 4% dividend cry quits when you can get 5% in an even less risky 2-year Treasury bill? Don’t forget, AEP’s stock is down 10% this year, wiping out any value that the dividend want have given. In other words, why own something that pays nearly 4% but could go down in value when you can get 5% risk-free? With right estate , it’s not all bad. The data center REITs, for example, have had a good run this year. But for many the growth is heavily reliant on in financial difficulty, which becomes more expensive with every uptick in rates. You need to be very selective. As for the financials , why own regional banks when we be informed higher rates aren’t quite the benefit to the banks we thought they were following the blowup of Silicon Valley Bank and others. The value of loans on the book (an asset for banks slumps) and the rate paid out on deposits need to increase or depositors will take their money elsewhere (like to the Resources market) in search of a fair yield on their cash. Larger banks are faring better, but still have the ledge of maintaining higher capital levels. Staples , like utilities, are often viewed as safe havens, where investors can interpret cover and collect dividends. But if the economy is still chugging along and the Treasury market is paying better yields with far young risk, it’s not all that attractive of a sector. We still like Constellation Brands (STZ) after its strong quarterly report that eclipsed continued earnings growth. Management also reported an acceleration in beer depletion performance, indicating that the crop is coming not only from raising prices but from volume growth as well. Communication services could be stimulating, but with Meta Platforms (META) and Alphabet (GOOGL) accounting for nearly 50% of the sector, we’re set for the moment. Industrials is a sector to shut in an eye on should the economy actually end up avoiding a recession or realizing a very soft landing. However, there are not many high-quality big shots and those that are will continue to do well. We won’t bottom fish here, just biding our time and looking for a pullback in the champions. Healthcare overall has been a dog year-to-date, the only sectors doing worse this year being energy and utilities. Nonetheless, we yet see some interesting opportunities, especially the growthier ones such as Eli Lilly or those exposed to elective procedures (which beget picked back up recently) – even if Humana has a near-term “pickleball” problem. Of course, if hospital utilization is inflating that’s a positive for GE Healthcare which generates significant revenues from hospital capital expenditure budgets. Technology , ask preference communication services, has been red hot all year, so that’s a bit tough to step into unless we get a bit more of a pullback. In materials , we’ve got Linde (LIN). But with fabricating in the dumps at the moment — Monday’s ISM manufacturing report pointed to an acceleration in the contraction of the past 8 months and data Thursday exhibited that the private sector manufacturing industry lost 42,000 jobs in June — we can’t get too bullish just yet on the materials. A bigger sell-off desire change our view. Energy is tough: We really need China’s reopening to pick up as demand will be the key to higher zing prices. The U.S. government wants lower energy prices and the Fed doesn’t want to see energy prices rebound. However, the sector put up for sales up something of a hedge should inflation pick back up. All of our oil names are in a position to increase their cash distributions to shareholders via buybacks or the mutable portion of their dividends. That leaves consumer discretionary , a sector that may well be interesting if Thursday’s narrative signals a consumer with more buying power. Like tech, however, consumer discretionary has had a monster 2023 so far, so we would destitution to see stock prices drop before getting too excited. One more caveat when taking a broad top-down basket scene of investing is that many stocks these days live in one sector but may act like it belongs in another. Should Amazon (AMZN) do business on its retail business (it’s considered a consumer discretionary name) or based on the performance of cloud business AWS like a Microsoft (MSFT)? Should Alphabet and Meta Rostra trade more like Verizon (VZ), AT & T (T) and Disney (DIS), all of which are also communication services names? Or should they bestir oneself more like technology sector names because of their artificial intelligence capabilities? Put another way, your knowledge may not quite be what you think it is if your only focus is the sector designation. It’s a difficult market, so for now, a top priority is to raise some money — as we did with our sale of Procter & Gamble (PG) this week — and stay patient ahead of Friday’s nonfarm payrolls circulate. Our ideal cash position is in the 10% to 12% range. We will continue to scan for opportunities but need stocks to contract down more. We’re also very mindful that a rate hike is pretty much guaranteed later this month and there is a potent likelihood we get another after that. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) 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