As the U.S. awaits the next monthly payroll report, for July, from the Department of Labor on Aug. 3, how might investors look to play the job market? Probably the easiest way to play any pickup in job creation is just to buy the market, like the SPDR S&P 500 ETF (NYSE:SPY). That’s because stocks have become correlated almost one-to-one with weekly initial unemployment claims. As that thing trends down, the market trends up.
We often forget that there’s tremendous churn in the job market. Even in the best of boom times, new weekly jobless claims often come in above 300,000. Unfortunately, the four-week average currently stands above 367,000, and although it’s moving down, it’s doing so at a glacial pace.
There’s no guarantee the weekly data will keep moving in the right direction, but when they do, the market moves up. It’s hardly a sexy bet, but you could do worse.
After all, betting for or against jobs creation with specific sectors or stocks is pretty tough and risky — and at least in the bearish case, has failed miserably.
For-profit colleges were once thought to be countercyclical, meaning they would rise as the economy worsened. The idea being that when people can’t find jobs, they seek more education. If you can’t land a job in, say, construction, then why not study drafting or nursing at ITT Educational Services (NYSE:ESI)?
But that hasn’t been the case this time around, not while people are paying off debt — not taking it on.
Students and would-be students don’t want or can’t afford to take on new loans, and the for-profit educational industry is under investigation for its dodgy recruitment and market practices. That’s been hammering the stocks.
ITT dropped 12% on Thursday alone after posting disappointing quarterly results. It’s off 50% in the last year, and rivals aren’t faring much better. Strayer Education (NASDAQ:STRA) has dropped 45% over the same period. And Apollo Group (NASDAQ:APOL) has lost more than 45% in the last year.
Avon Products (NYSE:AVP) is another countercyclical play that has been an absolute dud. As a door-to-door seller of bath and beauty products, it depends on reps (formerly known as Avon Ladies) to move its goods. When times are tough and unemployment is high, more people join Avon to make ends meet.
But weak results, especially in Brazil; a string of high-level executive departures amid a bribery scandal; and the company’s rejection of an unsolicited $10 billion cash offer from Coty have killed shares. Avon has lost about 45% in the past year.
If, on the other hand, you’re bullish on the job market, staffing agencies theoretically offer a way to play that growth. More hiring means more clients, after all. Also, a pickup in full-time employment is always preceded by an increase in temp workers, as employers dip their toes in the business expansion waters.
However, be forewarned that you’ll be making a contrarian bet. Job growth remains tepid, so naturally the market has been pressuring staffing company stocks.
Manpower (NYSE:MAN), Robert Half International (NYSE:RHI) and Kelly Services (NASDAQ:KELYA) are off 5% to 15% for the year-to-date.
Yes, those sell-offs have made the shares certainly look cheap, at least by trailing and forward price-to-earnings ratios. And the staffing companies do pay decent dividends, ranging from 1.7% to 2.6%.
If you feel contrarian and can stand being early — perhaps very early — the staffing companies could offer a lot of upside once the economy gains enough steam to kick hiring into second gear.
But you’d be safer just buying the market.
As of this writing, Dan Burrows held none of the securities mentioned here.