They finally did it. The Federal Reserve raised interest rates for the first time in 9 years. After nearly a decade of accommodative monetary policy, quantitative easing, and near zero interest rates, the Fed jumped off the fence by raising rates by a quarter of a percent.
The interest rate increase itself will have very little effect, if any, on the economy. However, it is signaling something far bigger than just the beginning of a cycle of interest rate increases.
It is signaling a greatly improved economy. The Federal Reserve no longer has to coddle and baby the economy to keep it moving along. The economy has truly been jump started and it’s time for the Fed to step aside so free market forces can continue to improve the economy.
One of the primary triggers the Fed uses to determine that the economy has improved enough to lift interest rates is employment growth.
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Employment is truly the engine of the economy. Robust employment signals a strong economy.
The entire stock market will benefit from an improved and growing economy. However, there are certain companies that depend directly on employment for their profits.
We have identified 3 specific stocks that are poised to greatly benefit from the improving employment situation.
Before we dig into these stocks, let’s take a closer look at what is happening on the employment front.
According to the Washington Post, U.S. companies continued their robust pace of hiring in November, new government data showed Friday, providing a signal of economic health that will likely spur the Federal Reserve to raise interest rates later this month.
The economy added 211,000 new jobs while the unemployment rate held at 5 percent, a 7½-year low, even as more Americans began hunting for work in a sign of labor market confidence.
The latest figures released by the Department of Labor indicate a hardy U.S. economy that has been powered by consumer spending and new jobs, despite the instability of feeble commodity prices and a strong dollar.
The latest jobs data was squarely in line with market expectations but still helped drive up shares on Wall Street, where investors for weeks have been gearing up for Fed action. The Dow Jones average and Standard & Poor’s 500 index both shot up more than 2 percent Friday.
The United States has added 2.3 million jobs this year, an average of 209,000 per month. That pace is stronger than any year over the past decade other than 2014. Revisions to jobs figures for two earlier months also provided a slight boost; the government now says 298,000 jobs, rather than the initially forecast 271,000, were created in October.
It is important to note that the economy needs to add 100,000 jobs per year simply to break even due to attrition. Therefore, any number above 100,000 is in the growth column. As you can see, the growth is currently more than doubling the breakeven level.
Drilling into specifics, job growth in November was fueled by robust gains in the construction industry, which expanded at its greatest pace in close to 24 months. However, at the same time, the mining sector contracted — which in November gave up 11,000 jobs due to low oil prices.
The Washington Post continued to explain, “Most economists say that the labor market has been the strongest element of the U.S. economy, even though wages have been slow to rise. After spiking in October, the average hourly pay for U.S. workers rose only modestly in November, growing by four cents, to $25.25. Most economists want to see wages rise consistently over a long period — a sign that the reservoir of job seekers has shrunk to the point where employers give raises to compete for hires.
That virtuous condition, known as full employment, is one of the final key pieces of a full economic recovery. More widespread wage gains would also help lift consumer prices, pushing inflation back toward 2 percent — a long elusive target that the Fed considers to be healthy. The Fed is charged by Congress to keep prices stable and maximize employment.
Many potential workers, though, still languish on the sidelines. The number of long-term unemployed still stands well above the number from before the Great Recession, as does the number of people reluctantly working part-time. The labor force participation rate — the percentage of Americans holding down or seeking a job — is at a historically low level and has fallen steadily for years.
“We’ve seen a nudging-up of wages, but it’s certainly not accelerating at a rapid enough pace where we would say there is widespread labor shortage,” Heidi Shierholz, the Department of Labor’s chief economist, said.”
Obviously the entire economy benefits from improving employment. However, there is are two specific sectors whose profits are directly related to growing employment numbers. These sectors are creating profits for savvy investors on the back of the improved employment picture.
The sectors are payroll and human resources/staffing companies.
Our favorite three companies in these sectors are Automated Data Processing (NYSE:ADP), Manpower (NYSE:MAN) and Paychex (Nasdaq:PAYX).
Let’s take a closer look at each of these companies.
- Automated Data Processing (NYSE:ADP)
This company manages payroll and administrative for 440,000 small businesses. It boasts annual revenues of over $11 billion, has operating margins of 18% and most bullishly of all, projects EPS growth of 28% in 2016.
Add in the fact that ADP has increased dividends annually over the last 41 years and can easily return 60% of its cash earnings, it paints a very compelling picture for the company.
It describes itself as a provider of human capital management (HCM) solutions and business process outsourcing.
The Company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services.
The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions.
The Company’s PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, including HR administration, employee benefits and employer liability management, into a single-source solution, including HR administration, employee benefits and employer liability management.
- Manpower (NYSE:MAN)
This human resources and staffing company has revenues of $20 billion, and projects 2016 EPS growth to be a respectable 11%.
The Germany-based firm describes itself as a provider of recruitment and assessment, career management, outsourcing, workforce consulting, and training and development, including training courses and leadership development solutions.
The Company provides clients with outsourcing services related to human resources functions primarily in the areas of recruiting and workforce-intensive initiatives.
It operates through various brands, including Manpower, Experis, Right Management, and ManpowerGroup Solutions, and is divided into five segments: Americas, Southern Europe, Northern Europe, Asia Pacific Middle East (APME), and Right Management. The Right Management segment focuses on outplacement services, career management consulting, leadership development and cooperates with students and universities.
- Paychex (Nasdaq:PAYX)
The smallest of our three companies, PAYX boasts a market cap of just $2.8 billion yet produces an operating margin on 39% and projects 19% EPS growth in 2016.
Paychex, Inc., is a provider of integrated payroll, human Resource, insurance, and benefits outsourcing solutions for small- to medium-sized businesses.
The Company focuses on providing payroll and human Resource services; delivering these services; growing its client base, through the efforts of its direct sales force; improving client service, through its leading-edge technology; capitalizing on the growth opportunities within its existing client base and from new clients; investing in business through expansion of its services and product offerings; and supplementing its growth through strategic acquisitions. The Company offers services and products that allow its clients to meet their diverse payroll and human Resource needs.
These include: payroll processing; payroll tax administration services; employee payment services; regulatory compliance services; Paychex HR Services; retirement services administration; insurance services; and online HR administration services.
As you can see, each of these three companies will continue to profit in lockstep with the improving employment picture. We firmly believe that each one of them will make a great investment for 2016!