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At Astor Asset Management, we are known for creating ETF portfolios 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 various 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.
Recent history provides a few examples. Employment trends saved me a lot of trouble in late 2000, as I sat out much of the pain experienced by the dot-com bust. Fast forward seven years and, having identified a contracting labor market in late 2007, just before the subprime debacle, fortuitously saved me much pain. Now that the current recovery is well underway and an expansion is upon us, employment trends can help one to balance a portfolio by investing in the sectors with the greatest employment growth.
The employment report is still the granddaddy of reports to use to build a road map for long-term direction and sustained investment goals and objectives. The most recent U.S. labor market data, released last Friday, provides us with new clues as to where the best opportunities are available. In reviewing the latest report, the following sectors stood out as the strongest:
- Health Care: This sector added 34,000 jobs. Investors can purchase the iShare Dow Jones Healthcare Index (IYH) - Get iShares U.S. Healthcare ETF Report to get exposure to this hot sector.
- Manufacturing: Last month, this industry added 33,000 jobs. A way to play that growth is in the, the Claymore Morningstar Manufacturer Super Sector Index ETF (MZG) .
- Construction: Although construction added 33, 00 jobs, recall that it lost 2,200 jobs in January. I would not jump on board yet in this area or related business.
- Transportation: Of the 22,000 jobs that were added, most were in trucking. The iShares Dow Jones Transportation Average (IYT) - Get iShares US Transportation ETF Report is an excellent ETF to capture this growth. With energy prices on the rise, this will be a counterintuitive move.
The big losers (from a jobs standpoint) were state and local governments, which have shed 377,000 jobs since the peak in 2007. However, I would be careful here and not rush to sell securities related to these municipalities, such as
Pimco Intermediate Muni Bond Strategy ETF
, which tracks the municipal 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 your exposure to sectors that are losing jobs, your 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.
At the time of publication, Stein and Astor Asset Management held no positions in any securities mentioned.
Rob Stein is the managing partner and founder of Astor Asset Management and senior portfolio manager of the Astor Long/Short ETF Mutual Fund. He began his career as an economist at the Federal Reserve, under then-Chairman Paul Volcker. From there, he was employed in senior trading or portfolio management positions with Bank of America New York, Harris Bank Chicago and Continental Bank Chicago, which was acquired by Bank of America.