We have a buyer’s mentality heading into Friday’s highly anticipated jobs report

With back-to-back days of hawkish testimony from Federal Reserve Chairman Jerome Powell behind us, Wall Street came out of gates stronger Thursday. However, any support from the 2-year Treasury yield dipping from recent multiyear highs was not enough. Stocks accelerated to the downside late in the session as worries resurfaced about how Friday’s employment report might influence Fed policy. So where do we go from here? One week ago, according to the CME FedWatch Tool , the market was pricing in a roughly 70% probability of another quarter-point Fed interest rate hike at this month’s meeting and about a 30% likelihood of a half-point rate increase. On Thursday, those probabilities largely reversed, with investors factoring in a roughly 75% likelihood of a half-point raise and about 25% chance of a quarter-point move. Take those odds with a grain of salt because things change quickly. Depend on the data Powell’s testimony Tuesday before a Senate panel and Wednesday before a House panel was lengthy and covered a broad range of issues, including rates, inflation, the debt ceiling and cryptocurrency regulation. Powell’s commentary about rates and inflation are what we care about most. On that score, he acknowledged the potential need to raise rates “higher than previously anticipated” to battle sticky inflation, but stressed that he intends to rely on data heading into the Fed’s March 21-22 meeting. That includes the government’s February nonfarm payrolls report on Friday and the latest readings on consumer inflation and wholesale inflation next week. Economists estimate that 207,500 nonfarm jobs were created in February — less than half of January’s much stronger-than-expected 517,000 additions . Average hourly earnings in February are expected to be up 4.7% year over year, following a 4.4% annual gain in January. Under normal circumstances, we would want to see these payroll estimates matched, if not exceeded, because a stronger job market tends to keep wages high. However, these are not normal circumstances. With inflation as the greatest headwind to the market and the economy in general, we want to see softer results — not so low as to spark fears of an economy about to crash but low enough to indicate the Fed’s rate hikes are breaking the back of inflation. A hotter-than-expected jobs print could very well signal a lock on a half-point Fed hike. That could send bond yields higher and stocks lower, especially high-flyers that are short on profits. That’s the key reason we’ve stressed over the past year that investors must focus intensely on companies that do things and make stuff for a profit, generate cash that they can return to shareholders via dividends and buybacks and trade at reasonable valuations to their peers and the market. Whatever the jobs number, we contend stocks are in the early stages of a new bull market. As a result, there’s more to gain by looking for buying opportunities than eyeing the exits or trying to trade around the data. The vast majority of us recognize we can’t successfully time the market on a consistent basis. It’s just not a game we have any interest in playing. Long-term investing in great companies and increasing our exposure when opportunities present themselves is what we’re all about at the Club. Key to this view is that we are stock driven, opting to do the research on individual companies and unwilling to simply buy the entire market or even entire sectors. In this market especially, stock performance can differ greatly within a sectors. Consider the Consumer Discretionary sector . If you decided to purchase the XLY sector spider ETF , the top five holdings you would take on are Amazon (AMZN), Tesla (TSLA), Home Depot (HD), Nike (NKE) and McDonald’s (MCD). While the market may consider all of these to be companies that sell discretionary goods and services, a Tesla vehicle is obviously going to be a whole lot more discretionary than a pair of Nikes. Moreover, McDonald’s is a cheap way to eat out, while Home Depot is tied to the housing market. Club holding Amazon is e-commerce and cloud computing, and the stock is going to move based on management’s cost-cutting plan following overspending during the pandemic. Why we’re buyers here Why stay bullish in the face of higher rates? For starters, stocks don’t trade based on the here and now. The market is a discounting machine, which means we’re not trying to price-in today’s environment. We’re instead looking out six to nine months and attempting to determine where things will stand then. We buy or sell based on that worldview , something that Jim Cramer said every investor must have before picking any stocks. We see early signs of disinflation based on what companies are saying and predict rates will peak in the middle of this year. If that proves to be the case, investors will get more bullish from here, not less so. The time to get bearish was in late 2021 when we were looking at the start of a rate-hiking cycle, not at the end of one. One reason to have a buyer’s mentality is the broad-based pessimism from investors and market strategists. If your strategy is to approach the market as a long-term investor, the best buying opportunities don’t come when everyone else is greedy, they come when everyone is fearful. That’s not to say that just because everyone is scared you must buy anything and everything. But you can look for deals on quality companies with bright futures. A yield of 5% on a 2-year Treasury, which certainly carries less risk than equities, is a very real alternative to stocks right now. Whether bonds are appropriate for your portfolio is a conversation for your financial advisor. However, if rates are peaking, are you going to see more upside in bonds or equities over that time horizon? We believe the answer is stocks. A recession is a very real risk that could result in downward earnings revisions and put more pressure on stocks. We’re gauging the odds of a so-called “hard landing.” But right now at least, the economy is resilient. And that’s what we want, disinflation with a resilient economy. That’s why we hope to see that softer wage number in Friday’s jobs report. The market may be obsessed with determining how much higher rates will go and the possibility of an earnings recession. After all, S & P 500 price targets are based on earnings estimates and valuation multiples. However, it’s not our style to paint the market with a broad brush. We get our hands dirty with research and invest in companies that are growing earnings, trading at reasonable valuations and offering dividends and/or engaging in buybacks. There’s our mantra again. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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