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Is the Dour Jobs Report a Sign of Things to Come?

Sunday - 4/7/2013, 2:53pm  ET

Investors received a rude awakening on April 5, when the government released its March payroll data—and the outcome wasn’t good. U.S. employers added only 88,000 to the payrolls in March, representing the slowest pace of hiring in nine months. March hiring was well below expectations of 200,000 jobs, according to Reuters. The unemployment rate fell to 7.6%, but that has much more to do with the declining labor force participation rate than real job creation.

In fact, the labor force participation rate is at its lowest level since 1979. The March jobs data hit the markets like a ton of bricks, with the Dow Jones Industrial Average falling as much as 170 points in the immediate aftermath of the report. Investors might be asking themselves if this report is a sign that the markets are on the brink of another prolonged downturn, or whether this is an opportunity to buy the dip.

These stocks could use a pullback

Investors with an eye out for opportunities, who may have felt reluctant to allocate money to stocks in the midst of such a run-up, are likely hoping that the pullback continues. After all, if valuations come down, dividend yields will rise, and investors can buy their favorite stocks for better prices.

It’s fairly difficult to say that America’s blue chip stocks weren’t fully valued prior to the poor jobs report. Johnson & Johnson , Coca-Cola , and Clorox were all trading for more than 20 times their trailing earnings per share. In addition, whereas these stocks could have been had for dividend yields nearing 4% only months ago, investors could only secure 3% yields at recent prices.

Each of these stocks had very recently either breached or approached their all-time highs, and it’s not like they’ve been reporting gangbuster growth in their recent financial reports.

J&J managed to grow diluted earnings per share by 10%, but saw only 3% revenue growth last year. Coca-Cola likewise grew revenue by 3%, and diluted EPS came in with 6.5% growth. Clorox, meanwhile, grew both revenue and diluted EPS by 4%.  Considering that these stocks are some of America's most mature companies operating in slow-growth industries, P/E ratios exceeding 20 don't necessarily represent screaming bargains.

Wall street vs. main street

Investors need to remember the disconnect between the stock market and the broader economy. After all, the Dow Jones Industrial Average is only 30 of America’s large corporations. Corporate America has shown a remarkable ability to remain profitable and grow profits, even when so many real Americans are still struggling. If you think about it, there’s actually an explanation—part of the reason our nation’s biggest companies have reported resilient profits is because they’ve been laying people off.

While there’s only so much meat corporate America can hack off the bone, the recent jobs data reinforces the notion that profits are being realized through drastically lowered expenses, as opposed to huge growth in sales. One month of a poor jobs report likely shouldn’t be taken as an immediate cause for concern, but it does remind us all to not get too caught up in the market’s breaking new highs. It’s an important dose of perspective: we’re still (unfortunately) in the midst of a painfully slow economic recovery.

Several markets are showing strength, including the stock market and the housing market. However, the employment market remains an extremely difficult environment. As a result, adding defense to your portfolio is never a terrible idea. In fact, stocks such as J&J, Coca-Cola, and Clorox are all outstanding companies that, if the market’s fall should continue, might actually get back into value territory.

Keep an eye out for opportunities

Large-caps that were trading for more than 20 times earnings, such as these three, will become much more attractive should the market pull back further. Should these companies’ valuations fall back into similar territory as the S&P 500 Index, at about 16 times trailing earnings, they’d become extremely attractive. Their profits and dividends are sure to keep rising over time, and if you snag them for lower stock prices, their dividend yields will be even higher than they are now (since prices and yields move in opposite directions).

It’s debatable whether American blue chips such as these really deserved to be trading above 20 times earnings, considering their restrained growth as of late. A pullback would present attractive opportunities for investors with money on the sidelines who are tired of earning nothing from traditional bank products. These stocks will soon be going on my watch list in case of a further decline, and it would be wise for many investors to do the same.

This article was originally published as Is the Dour Jobs Report a Sign of Things to Come?on Fool.com

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