The Employment Situation Road Map

At Astor we are known for creating portfolios of ETF’s using employment trends as a key factor. Research and history have proven that employment trends are an excellent indicator of the long term direction of the economy and sectors. Of course it is not a one-to-one correlation and sometimes employment trends lag a bit, but for my money sticking with the employment trend keeps you out of trouble.

Look at recent history for a few examples. Employment trends kept me out of trouble in late 2000, sitting out much of the pain of the dot com bust. Fast forward seven years, and identifying a contracting labor market in late 2007 just before the subprime debacle saved you a lot of pain, fortuitously. Now that the current recovery is well underway and an expansion is upon us, employment trends can help balance a portfolio by investing in the sectors with the greatest employment growth.

With the latest data on the US labor market released last Friday, new clues as to where the best opportunities lie are available. This will most likely be a very boring, albeit useful and informative article. I promise to have a bit more wit and even humor in the other article posted during the month. There will be, of course, short term opportunities presented with other data points, political events and economic releases, as well as cute moves to capture short term fluctuations using ETFs. My hope is to regularly identify these opportunities as they present themselves. All that withstanding, the employment report is still the grand daddy of reports to build a road map to long term directions and sustained investment goals and objectives.

As I review the latest report areas of strength, those that jump out are the following:

•Healthcare – added 34,000 jobs. Investors can purchase the iShare Dow Jones Healthcare index (IYH) to get exposure to this hot sector.
•Manufacturing – added 33,000 jobs last month. A way to play that growth is in the MZG, the claymore Morningstar super sector of companies that make stuff.
•Construction- Although construction added 33, 00 jobs, recall that it lost 2,200 jobs in January so I would not jump on board yet in this area or related business.
•Transportation – Added 22,000 jobs mostly in trucking. The iShares IYT is an excellent ETF to capture this growth. With energy prices on the rise, this will be counter intuitive and should climb the preverbal wall of worry.
The big losers (from a jobs stand point) were state and local governments which have shed 377,000 jobs since the peak in 2007. I would be careful here and not rush to sell securities related to these municipalities, such as MUNI which is the ETF that tracks the muni bond market. The default rates are very low for munis and one or two bad apples should not spoil the whole bunch, but it could add unnecessary volatility to your portfolio (read opportunity as well).

Our lesson from an employment perspective is that if you add exposure to sectors that are adding jobs and reduce to the sectors that are losing jobs, you portfolio should have lower risk and volatility. After all, job growth is a sign of health and confidence, and pockets of strength are always good. Of course there is no magic bullet that can prevent the economy from losing steam and reversing course but these sectors tend to hold up better in a down turn and run farther in the expansion.