Weak Jobs Report May Test Cockroach Theory

Nonfarm payrolls rose by 209,000 during the month of June, significantly below Wall Street’s consensus estimate of 240,000, representing the lowest monthly payrolls figure since December 2000. 

The strong jobs market over the past two years is showing the first signs of weakness, and could be a forebearer of the cockroach theory—the premise that when a company reveals bad news, more is yet to come. Unless, of course, this is a rare case when the cockroach is celibate.  

This potential early-stage turning point is a chance for financial advisors to help their clients. After all, it is dizzying to look at all of the numbers in the employment report. So, professional translation can certainly help. 

In addition, the U-6 measure of unemployment spiked from 6.4% to 7.0%. To many on Wall Street, this is a truer measure of the health of the job market because it includes those employed part time for economic reasons, as well as “discouraged workers” who want to work but have essentially given up trying.  

It’s also possible that we are reaching the point in the economic cycle where, as strong as the employment market has been for longer than many expected, job growth may just narrow to a smaller number of sectors and industries. In that latest report, healthcare and construction were among the continued sectors adding jobs at a decent pace, while retail employment declined.

If this turns out to be the cockroach theory in action, exchange-traded fund investors might take a cue about relative strength in the stock market based on hiring trends.  

ETFs for Jobs Report 

The First Trust Health Care AlphaDEX Fund (FXH) is distinguished from more popular healthcare ETFs because it does not simply select and allocate its holdings based on the market capitalization of the stocks.  

Instead, this $1.5 billion ETF, which has been around since 2007, applies a proprietary growth and value screening technique, and the resulting holdings are equal-weighted. This was one of the early “smart beta” ETFs, and is part of a series offered by ETF issuer First Trust. FXH is down 2.6% this year, reflecting the difficulty that all except the very biggest stocks have had, despite strong gains in the S&P 500. Its 10-year annualized return is 10.2%. 

The Invesco Dynamic Building & Construction ETF (PKB) similarly eschews the standard market-cap-weighted portfolio mix. However, its construction (pun intended) may still emphasize the larger companies, but with a dedicated portion of the fund invested in small and midcap stocks. That currently results in a 32-stock portfolio. PKB is a hidden gem of sorts, with assets of $233 million despite an 18-year history. It is up 28% so far in 2023, and its portfolio sells for a mere 8.3x trailing 12-month earnings.  

And, for advisors and investors who believe digital marketing will keep rolling but traditional brick-and-mortar retail stock price gains are unlikely to last, a little $22 million ETF, the ProShares Long Online/Short Stores ETF (CLIX) thinks similarly.

One of a small set of long/short ETFs available, CLIX invests 100% of assets in online retailers, and uses 50% of the portfolio to short traditional retail stocks. That technically gives it a 50% “net stock market exposure.” But that has not stopped CLIX from gaining nearly 15% this year, in line with the S&P 500’s gain. 

Will the proverbial “one cockroach” theory apply if the jobs market recovers in next months’ report? If it does, financial advisors and investors are equipped to be great “exterminators” by considering the significant flexibility and risk-targeting offered by ETFs like these.