5 Stocks To Buy On Service Sector Strength
Zacks Investment Research | May 08, 2016 10:23PM ET
A disappointing employment report in April showed that job growth had declined to its lowest pace in seven months. The number of jobs added came in far lower than expected while the employment rate remained flat at March’s level. Following a series of mixed signals, this is the first significant indication that the economy may be slowing down.
However, the service sector shows no signs of slowing down as was borne out by last week’s ISM numbers. Nearly all the employment gains for April came in from three services sectors. Adding stocks from these areas to your portfolio makes good sense at this point.
Job Growth Flags
The U.S. economy created a total of 160,000 jobs in April, significantly lower than the consensus estimate of 203,000. The tally was also considerably lower than March’s downwardly revised job number of 208,000. Moreover, the unemployment rate in April was in line with the consensus estimate and March’s rate of 5%.
However, average hourly earnings gained 0.3% or 8 cents in April from the previous month’s figure to $25.53. This was the third highest monthly gain in a year. Average hourly earnings also witnessed a 2.5% rise from the year-ago figure.
Services Power Gains
The lion’s share of job additions came from three areas, professional and business services, healthcare and the financial sector. Coming in at first place was professional and business services with 65,000 job additions. Management and technical consulting services added 21,000 jobs.
The number of jobs in the healthcare sector increased by 44,000. Ambulatory health care services and hospitals contributed 19,000 and 23,000 jobs, respectively. Financial activities provided 20,000 more jobs with credit intermediation and related services adding 8,000 positions.
ISM Gauge Hits Four-Month High
The ISM Services Index increased from 54.5% in March to 55.7% in April, indicating expansion in servicing activity for the 75th straight month. Additionally, the reading was more than the consensus estimate of 54.8%. This was the highest reading for the index in the last four months.
Currently, the services sectors have come to comprise nearly 90% of the U.S. economy. Weighed down by weak global economic conditions and a stronger dollar, manufacturing is traversing particularly troubled waters. On the other hand, sectors which are relatively insulated from global weaknesses, such as health care providers, have been faring much better.
Our Choices
Strong services sector growth is shoring up the economy at a time when it is beset by troubles from abroad. This is specifically true for those industries which are relatively insulated from the weaknesses of global demand and a rising dollar.
Investing in such sectors makes good sense, especially because such conditions are expected to prevail for some time now. However, picking winning stocks may be a difficult task.
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