January 11th, 2025 | JOLTs , Apple Intelligence, Tariffs, Catch-Up Contributions, Expand Energy Corporation (EXE), Paychex, Inc. (PAYX), Cintas Corporation (CTAS) & United States Steel Corporation (X)

Smart Investing with Brent & Chase Wilsey

The job report was good, but why is that bad?

Before we go into why the good report was bad, let’s talk about some of the data. The expected number of payrolls was 155,000, which came in well above that at 256,000 jobs for the month of December and also increased from November when it was 212,000 jobs. This high increase in payrolls caused unemployment to drop to 4.1% and came along with an increase in average hourly earnings of 0.3% for December. Over the last 12 months average hourly earnings have increased 3.9%, which is a decent number, but just under the expected growth in average hourly earnings. Job Growth was seen in healthcare with an increase of 46,0000 jobs. That was followed by leisure and hospitality which saw an increase of 43,000 jobs and government jobs, which includes Federal, state and local jobs were up 33,000. Because it was a holiday season there was an increase in retail jobs of 43,000 after the loss of 29,000 jobs in November. There are always revisions to the previous two months, but there was not much change here as October saw an increase of 7000 jobs and the November report was actually cut by 15,000 jobs which produced a total decline of only 8000 jobs for the past two months. Because the job report was so good compared to expectations, this put fear in the stock market and bond market that there may not be any interest rate cuts until the fall of this year. This also led to concerns that we could maybe see more inflation going forward. Maybe that makes sense for traders to sell, but investors should want a strong economy. That means your businesses will sell more goods and services and increase their profits. Interest sensitive equities like real estate were hit pretty hard with a good job report and banks also had a little trouble digesting the good report and declined as well. For investors I think this is a good report because it shows strength in the economy and based on the recent job openings from the JOLTS report, I think 2025 will be a good investment year for investors in fairly valued equities, but you will see a lot of scary volatility, which smart investors should use as a buying opportunity.

Job openings report sends the market lower!

The JOLTs report, which stands for Job Openings and Labor Turnover Survey showed an impressive increase in job openings in the month of November to 8.096 million. This easily topped the estimate of 7.65 million and October’s reading of 7.839 million, which was revised upward from the initial number of 7.744 million. While this points to a labor market that has continued to remain strong, there were some indications of softening. On a year-over-year basis, job openings fell by 833,000 and the quits rate moved from 2.1% in October to 1.9% in November. This indicates workers are less confident in finding another job if they quit their current one, which should put less pressure on wage inflation. The resiliency in the labor market is concerning for those that are looking for more rate cuts as a strong labor market allows the Fed to be patient and wait for inflation to cool further. The news paired with a December US services sector report that showed faster-than-expected growth and higher prices paid caused the ten-year Treasury to climb to around 4.7%. This spooked many speculative areas of the market including technology and cryptocurrencies.

Apple Intelligence, maybe not so intelligent?

Apple’s AI system, also known as Apple Intelligence, has been having some issues and has been spreading fake news. One of the AI features for iPhones summarizes users’ notifications, but some of the news stories it has been summarizing has been completely inaccurate. It recently attempted to summarize a BBC News notification that falsely claimed British darts player Luke Littler had won the championship. Unfortunately, this came a day before the actual tournament’s final, which Littler did end up winning. Maybe Apple Intelligence is so good it can predict the future? This was not the only false story though as Apple Intelligence has now wrongly claimed that Tennis star Rafael Nadal had come out as gay, Luigi Mangione, the man arrested following the murder of UnitedHealthcare CEO Brian Thompson, had shot himself, and that Israeli Prime Minister Benjamin Netanyahu had been arrested. The BBC in particular has been trying for a month to get Apple to fix the problem. In response, Apple apparently told the BBC it’s working on an update that would add clarification that shows when Apple Intelligence is responsible for the text displayed in the notifications. This compares to the current situation where generated news notifications show up as coming directly from the source. To me this doesn’t sound like a good solution as it doesn’t solve the problem and most people likely wouldn’t read past the headline anyway. This could still make the news organizations look bad, which I’m sure they are trying to avoid. Personally, I’m still not seeing the need to upgrade to the new iPhone, especially if these new AI features don’t provide any value. From an investment standpoint, as you likely know we still believe Apple is extremely expensive trading at nearly 30x future earnings and would not recommend the stock at this time.

The tariffs are coming, who could get hurt?

The retail industry will take a big hit on profits. It is estimated that about 23% of durable consumer goods like refrigerators, washers and dryers are connected to imported goods. About 19% of non-durable goods such as diapers, clothing, shoes and towels have some sort of dependency on imported products. These could be slightly higher because the only data available was from the Federal Reserve Bank of San Francisco that came out in a 2019 study. You may think that technology and the Mag Seven will be immune from the hit to profits, but even they could face problems. Nvidia has a 76% gross margin so they should be able to absorb most, if not all of any tariffs that come their way. Apple has half the gross profit margin of Nvidia at 37% and most of their products are built in China, which could be a huge dilemma for Apple. It is no guarantee but last time around the CEO of Apple, Tim Cook, was able to get an exemption on their products. Will that happen in 2025? That’s the big question. If they don’t get the exemption, their stock could take a massive hit that could be more than Apple investors have seen in a while. If you’re an Apple investor, you may want to use the sophisticated investing technique of crossing your fingers and anything else you’re able to cross as well and hope for the best. With the other Mag Seven such as Microsoft, Alphabet, Amazon and Meta, their products are safe but keep in mind that combined they spent roughly $200 billion in capital expenditures in the most recent quarter and about 60% was on imported equipment. The other industry that could take a big hit would be carmakers, such as Ford, General Motors and Stellantis and we could see hits to the operating profits anywhere from 20 to 30%. The big fear here is the estimate is between 50 to 70% of parts for the popular cars sold in the U.S. come from Canada or Mexico. Experts estimate that the consumers will see about a 6% increase in the price of new cars sold here in the US. I can’t even imagine what the increase on the price of a car will be if it’s a full import like a Porsche, Maserati or Ferrari. The good news is that the economy in the US is far stronger than Europe, China and Mexico, so we can weather the storm and be in a better negotiating position than those countries. With that said, I do believe we will go through some pain before things get better. I also believe if you have equities with high valuations in your portfolio that are affected by the tariffs, they could take a much larger hit than your low valuation companies that pay dividends.

Changes to Catch-Up Contributions

Every year the contribution limits for retirement accounts increase. This year is a little different because one of the provisions from the Secure Act 2.0 is now active. If you are under the age of 50, your contribution limit for an employer sponsored retirement plan like a 401(k) is now $23,500, an increase of $500 from 2024. If you will be 50 or older by the end of the year, you may make an additional catch-up contribution of $7,500 which means your total contribution limit is now $31,000. However, starting in 2025 thanks to the Secure Act 2.0, if you are between the ages of 60 and 63, you may make a catch-up contribution of $11,250 rather than $7,500, meaning your total contribution limit is $34,750. This age range is based on how old you will be at the end of the year, so if you are turning 60 this year, you are eligible to contribute the entire $34,750. However, if you are currently 63 but will be turning 64 this year, you may only contribute $31,000. If you are wanting to max out your retirement plan, make any necessary adjustments to your payroll contributions now so you don’t have to scramble at the end of the year. This addition catch-up contribution was implemented to help older workers prepare for retirement, but I don’t see how this will make much of a difference for anyone. It increases the contribution limit by $3,750 for 4 years, which is a total of $15,000. An extra $15,000 is not going to make or break anyone’s retirement, especially considering we already the option of funding non-retirement investment accounts after maxing out retirement accounts.

Companies Discussed: Expand Energy Corporation (EXE), Paychex, Inc. (PAYX), Cintas Corporation (CTAS) & United States Steel Corporation (X)