Weak Jobs Numbers Won’t Derail a Hot Economy. 3 ETFs to Buy.

Some areas of the economy, including consumer discretionary, are still positioned to deliver growth, says Sevens Report’s Tom Essaye. (CHARLY TRIBALLEAU/AFP via Getty Images)

Key Points

• The ADP National Employment Report showed a loss of 32,000 jobs for September, though other data indicates mild jobs growth.
• The Federal Reserve may continue cutting interest rates to boost economic growth, anticipating slowing inflation next year.
• Investors should consider sectors benefiting from aggressive economic growth and inflation, such as natural resources and consumer discretionary.

The economy isn’t falling apart, even with weak labor data. Select groups of stocks should benefit.

The ADP National Employment Report released Wednesday showed a loss of 32,000 jobs for September. The overall picture isn’t that scary, though, given that the Bureau of Labor Statistics data still show mild jobs growth and BLS figures are usually more accurate than ADP’s, Sevens Report’s Tom Essaye says. He adds that unemployment remains low and that it would take convincingly poor jobs data from more sources to severely threaten the economic outlook—something that’s not close to happening right now.

The most encouraging part of the entire jobs picture is that employment, while on solid footing, is slowing down a bit. That gives the Federal Reserve the ability to continue cutting interest rates to boost the economy’s growth, as the Fed anticipates slowing inflation next year.

The pieces are in place to cause the economy to run hot. It’s still showing signs of growth, including rising prices of goods and services, all while the Fed might lower rates to further boost spending. Some say the central bank should act more cautiously, or not even cut at all, but the reality is that it might slash rates a few more times.

Investors need to position their portfolios accordingly, which means buying stocks in sectors that tend to benefit from aggressive economic growth and inflation.

But selectivity is still an important skill to have because a few sectors aren’t great bets. The SPDR S&P Metals & Mining exchange-traded fund is up 63% this year, so a lot of the positive sales and earnings outlook is priced in to the stocks it holds. The Industrial Select Sector SPDR ETF has underperformed the S&P 500 since August 1, the start of the latest leg of the market’s rally premised on rate cuts, partly because the economic picture theoretically could send the 10-year Treasury yield higher. That pressures valuations of companies that are expected to produce high profit growth in the long term, a major feature of U.S. industrials.

That leaves just a few areas looking attractive.

Essay recommends the FlexShares Global Upstream Natural Resources Index Fund for its holdings of oil producers, chemical makers, and basic materials and metals producers. Those companies can see higher prices, and therefore rising profits, as demand increases for all sorts of basic commodities and inputs in an environment that features growing consumer and business spending.

The fund isn’t up as much as the metals and mining ETF this year, but it has risen 9% since August, beating the S&P 500’s 6.8% gain, indicating that any evidence that the economy will run hot can push these stocks higher. The ETF is at just under $44, below its record high of $48, hit in early 2022. A positive update from the Fed or any resurgence in the price of commodities and agricultural chemicals, which have been basically flat over the past few years according to St. Louis Fed data, could catalyze a breakout to new highs.

Investors might also consider the Consumer Discretionary Select Sector SPDR ETF. A hot U.S. economy means more consumer spending on travel, restaurants, sporting goods, houses, apparel, and the like. The fund hasn’t soared over the course of this year, but it is up almost 11% since August 1.

The SPDR S&P Regional Banking ETF had outperformed the S&P 500 from August 1 through Monday, before stumbling Tuesday. But the hot economy narrative would reinvigorate these the stocks it holds. Not only does a growing economy mean more loans and revenue, but lower short-term rates and stable or higher long-term rates make lending more profitable, lifting banks’ profit margins. Earnings could race higher—and so could the stocks.

The bank fund’s technicals look compelling. At $62, it’s still on its larger trend that began in early April. If it breaks above its high this year of $66, it could be on a path to $100, writes Cappthesis’ Frank Cappelleri.

Get ready for many of these stocks to rally.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com