The Labor Market Has Cracked

Bye Bye Great Resignation

The labor market looks like it’s finally beginning to feel the effects of the Fed’s aggressive interest rate hiking cycle, easing to more of a neutral and balanced state from the big supply/demand mismatch that led to the great resignation. The August ADP employment report came in below expectations, adding the fewest jobs in 5 months. Job openings hit their lowest level in more than 2 years. The Challenger job cuts number tripled in August compared to the prior month and the unemployment rate hit its highest mark since early 2022. Non-farm payrolls and jobless claims still look good, so it’s not bad news across the board, but there’s a very defined shift towards a cooling labor market that’s happening here. Since the labor market is a big driver of just about everything that happens in the economy, the groundwork for an economic slowdown is being laid.

How To Interpret the Signals: Within each strategy, there is a risk-on and risk-off investment recommendation, with the risk-off option being the more conservative of the two. When a particular signal indicates that investors should be risk-off, for example, subscribers should consider investing in the risk-off option and avoiding the risk-on option. The opposite, therefore, would be true when the signal flips to risk-on. In each strategy, you’d always be invested in one option or the other.

Here’s how to read the scorecard for each strategy:

Some of the strategies will be more aggressive than others. The “Leverage For The Long Run” strategy, for example, uses the S&P 500 and 2x-leveraged S&P 500. The more conservative “Lumber/Gold Bond” strategy, however, uses intermediate-term Treasuries and the S&P 500. In every case, a risk-off signal indicates that you should be invested in the more conservative of the two options, while a risk-on signal indicates you should be invested in the more aggressive one.

SHORT-TERM SIGNAL: UTILITIES/S&P 500 RATIO

Target Investor: Short-term traders with a higher risk tolerance interested in using an equity momentum strategy to anticipate changes in market risk tolerance.

Current Indicator: Risk-On

Strategy: Beta Rotation - Example: Invest in S&P 500 (SPY) over Utilities (XLU)

SHORT-TERM SIGNAL: LONG DURATION/INTERMEDIATE DURATION TREASURIES RATIO

Target Investor: Short-term traders with a higher risk tolerance who want to use the activity in the U.S. Treasury market to judge overall risk levels.

Current Indicator: Risk-On

Strategy: Tactical Risk Rotation - Example: Invest in S&P 500 (SPY) over Long-Duration Treasuries (VLGSX)

INTERMEDIATE-TERM SIGNAL: LUMBER/GOLD RATIO

Target Investor: Short- and long-term investors willing to trade more frequently using the classic cyclical vs. defensive asset comparison.