By Jack N., Communications Analyst and Blog Contributor
Allow me to state the obvious. High employment is a crucial part of the elixir that makes an economy flourish. But I’m here to demystify the markets, so if you indulge me just a few sentences, I’ll let you know what an improving employment picture could mean for many investors and traders.
First, let me say I’m a bit of an oddity. From the day as a 10-year-old when I tossed my first newspaper in a yard, to the moment I’m writing this, I have spent about three weeks unemployed – and that was in high school. Imagine a nation where, say, 96 percent of the country had a similar work experience (except for starting at age 10, perhaps).
High employment means more individuals have more disposable income to drive consumer purchases. And here is the key point: About 70 percent of the nation’s gross domestic product consists of household purchases, according to the U.S. Bureau of Economic Analysis. But that number is somewhat misleading because households have to spend their money on the basics, notably food, utilities, health care and housing. So there’s a base level of consumer spending that occurs regardless of the employment picture.
That’s why consumer staples (or consumer non-cyclical) stocks generally do well in most economic conditions. Consumer staples stocks generally don’t provide huge year-over-year stock price returns, but they can offer steady growth and oftentimes attractive dividend yields. Consumer Staples Select SPDR (XLP) exchange-traded fund, is the largest ETF in the consumer non-cyclical category based on assets. Top holdings with their percentage of net assets as of Jan. 3, 2013, are Procter & Gamble Co. (PG), 13.56 percent; Philip Morris International Inc. (PM), 10.43 percent; The Coca-Cola Co. (KO), 10.32 percent; and Wal-Mart Stores Inc. (WMT), 8.28 percent.
But what happens when the economy gets juiced by higher employment and more spending? Discretionary spending picks up. We might eat out more often. (Or 10-year-olds with newspaper routes might buy more candy). We’re more likely to buy new houses, appliances and cars. Oh, and those vacations that Americans have been putting off for a few years because they’re worried about their jobs? Well, it’s hello Hawaii or maybe Myrtle Beach. We saw that pattern emerge in the early 1980s, 1990s and 2000s. Consumer spending and higher employment combined to power the economy.
So when the economy begins to purr, consumer cyclical companies tend to do well. Consumer Discretionary Select SPDR (XLY), is the largest exchange-traded fund in the consumer cyclical sector based on assets. It’s top holdings as of Jan. 3, 2013, are Comcast Corp. (CMCSA), 6.75 percent; Home Depot Inc. (HD), 6.31 percent; Amazon.com Inc (AMZN), 6.25 percent and McDonald’s Corp. (MCD), 6.07 percent. Just to clarify, I’m not suggesting that you go out and buy these securities. Even though employment numbers and consumer spending on discretionary items are starting to improve, things could go backwards quickly. What I want to make clear is that higher employment typically spurs higher consumer spending, which can change the dynamics of the capital markets. And investors and traders alike should be prepared.
In Scottrade’s 2012 American Investor Study, 30 percent of investors said unemployment rates would impact their investing decisions over the coming 12 months. What effect would an improving jobs situation have on your investing or trading decisions?
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Jack N. is a communications analyst in the public relations department at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.
Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.
The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.
I believe the employment situatiion is getting better albeit at a slow pace. I have mentioned in the Community more than once and several months ago that construction in Central Florida was picking up. In my opinion, that was a leading indicator. I put a lot of weight in construction economic indiactors. I see 7-11's, RaceTrac gas stations, banks and other commercial projects going up. That means blue collar jobs and hard working Americans spending and saving money.