The US labor market continues to hold up

Bright spots & weak spots of the US labor market

Within the labor market, there has been variation relating to where jobs have been added the most. Some bright spots within the labor market were:

• Leisure & Hospitality – adding 88,000 jobs, however remaining 5.8% below pre-pandemic levels; keeping in mind that this was one of the hardest hit job markets during the pandemic.
• Health Care – adding 45,000 jobs
• Construction – adding 20,000 jobs
• Information Technology – adding 19,000 jobs
• Manufacturing – adding 14,000 jobs

Note: above figures are seasonally-adjusted

In contrast, there have been some weak spots in the labor market as well, such as:

• Transportation & Warehouse – losing 15,000 jobs
• Retail Trade – losing 30,000 jobs

Note: above figures are seasonally-adjusted

Some surprises in terms of job additions were in the construction and information technology sectors. When interest rates are rising it is typical for the construction industry to slow down given that real estate is a heavily debt-financed asset class. However, this has not been the case - instead the increases in construction jobs lend support to the real estate market and mortgage lenders. And in light of the many headlines surrounding large tech company layoffs, the growth in information technology jobs is also somewhat of a surprise.

Investment implications of the tight labor market

So, what next? If the labor market continues to remain tight, then from a macro-perspective this would lead to inflationary pressure and likely further interest rate hikes.

If this scenario arises then possible investment strategies to consider could be shorting the yield curve i.e., profiting when yields rise. This can be accomplished across different maturities of the yield curve such as:

ProShares Short 20+ Year Treasury ETF (TBF), which provides -1x the return of the daily performance of the ICE US Treasury 20+ Year Bond Index and essentially increases in value when 20+ year US treasury bond yields rise.

ProShares Short 7-10 Year Treasury ETF (TBX), which provides -1x the return of the daily performance of the ICE US Treasury 7-10 Year Bond Index and essentially increases in value when 7-10 year US treasury bond yields rise.

This strategy has worked very well this year, with TBF returning ~34% YTD and TBX returning ~16% YTD. However, as recession fears take hold, longer-term yields have fallen which poses a risk in this investment strategy.

Another investment strategy to consider could be investing in financial companies such as banks and brokerages, in other words businesses that make money off increasing interest rates. ETFs in this area to consider are:

SPDR S&P Regional Banking ETF (KRE), a highly liquid and low-cost ETF that provides exposure to US regional banks within the S&P Regional Banks Select Industry Index

iShares US Broker-Dealers ETF (IAI), a large, low-cost ETF that provides exposure to investment banks, brokerages and stock exchanges within the US.

Data for this article is as of December 6, 2022.

Please note this article is for information purposes only and does not constitute investment advice.