On the surface, it appears that 243,000 new jobs were created in January, lowering the unemployment rate to 8.3%. Just as it’s important to dig deep into a company’s financials to find out what’s behind a given number, you should do the same with government reports. When viewed in a vacuum, reports can be misleading. So, looking more closely at macroeconomic data can make the difference between a good or a bad investment decision.
In this case, you also want to look at the labor force participation rate, which reports what percentage of the eligible workforce is actually out looking for work. Say you have a town with 100 people who can work and the unemployment rate is 10%. Then 10 people are out of work. Let’s say those 10 folks give up looking and exit the workforce. Then the unemployment rate drops to 0%! Hooray! Well, no. Because the labor force participation rate went from 100% to 90%.
The same thing has been occurring in America. As you can see from this chart from the Bureau of Labor Statistics, the participation rate is down to 63.7%, the lowest in almost 30 years. There are many reasons for this, some structural (for instance, a Census Bureau population adjustment applied to the January 2012 employment figures), some related to policy. The trend, however, is unmistakable.
What’s relevant here is that this number means fewer workers are generating income, as opposed to what the unemployment rate indicates. Fewer workers earning money means less cash to spend overall. How does this translate to stocks? Stick with me.
Now look at the Consumer Confidence Index, which represents the degree of both present and future optimism on the economy that consumers express via their spending, determined by polls. A score of 100 is neutral, over 125 indicates strong confidence, and under 75 is weak.
Well, the CCI has been below 75 for almost four years. In January, it reversed several months of movement upwards and dropped again, to 61.1. In other words, people are really pessimistic about all aspects of the economy, and the indication is that they are more likely to save than spend.
So what does this mean for you, the investor? First, it means, follow the trend. As I wrote in “Coach Tells Us Rich Folks Are Spending,” the wealthy and people with stable upper-level incomes are already spending again, as are businesses. This means buying luxury retailers like Coach (NYSE:COH), Nordstrom (NYSE:JWN), and Lululemon (NASDAQ:LULU), and jumping on the resurgence of both business and leisure travel by buying hotel REITs like Ashford Hospitality Trust (NYSE:AHT), Pebblebrook Hotel Trust (NYSE:PEB), and Wyndham Worldwide (NYSE:WYN).
It also means you’re safe buying companies that sell consumer staples, because whether folks are working or not, they always buy certain products. That’s why I look to 3M (NYSE:MMM), Wal-Mart (NYSE:WMT), Philip Morris International (NYSE:PM), Coca-Cola (NYSE:KO), and Select Sector Consumer Staples SPDR (NYSE:XLP). I’d also grab Teva Pharmaceutical Industries (NASDAQ:TEVA), which is one of the world’s largest generic-drug producers.
Everything else that is literally caught in the middle. Products that are purchased with discretionary income are terribly exposed, and likely will be for some time, with the exception of entertainment and media.
Now, I’m sure some of you look at the Select Sector Consumer Discretionary SPDR (NYSE:XLY), which just hit a new high and think I’m crazy. But that ETF doesn’t really carry what I consider discretionary companies. I’m talking furniture companies like Furniture Brands International (NYSE:FBN), appliance makers like Whirlpool (NYSE:WHR), nonluxury clothing retailers like Hott Topic (NASDAQ:HOTT), and the automakers like Toyota (NYSE:TM) and General Motors (NYSE:GM) which is alive only because of a bailout. I would consider shorting all of these stocks for aggressive investors.
Lawrence Meyers owns shares of Ashford Hospitality and Teva Pharmaceutical. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.