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Low Unemployment Rates Equals Recession

Low Unemployment Rates Equals Recession

When everyone has a job, you should be worried.

Only three other times in the last 65 years has U.S. unemployment been as low as it is today.

It tells me a recession is coming. Probably within a year.

The blue line on the chart is the rate of unemployment in the U.S. The gray bars are periods of recession. When unemployment bottoms, a recession follows. On average, the contraction begins about seven months later.

Today, unemployment is around 4%. That’s way low! So low the Federal Reserve considers it “full employment.” In its mind, whoever wants a job has one.

Not good. There’s nowhere for unemployment to go but up.

But don’t sell everything yet. You can make big gains in an unexpected sector as the U.S. economy approaches recession.

The Chicken or the Egg?

You might think unemployment rises because the economy contracts. Not the other way around.

But consider why unemployment responds first…

An economy at full employment has been growing for years. Inflation is rising. So are interest rates. These items occur together when the business cycle is nearing its top.

As the cycle peaks, companies sacrifice workers to the gods of growth. Afterward, the economy contracts.

Until then, some investments still do well. Exceptionally well.

How You Can Play It

Natural resources, commodities and materials reward investors even after unemployment begins to climb.

The world still needs energy, metals and materials even if companies are already cutting workers. Persistent demand pushes up prices for things like crude oil, copper, steel, silver and gold.

The Invesco DB Commodity Tracking ETF (NYSE: DBC) is the largest U.S.-listed commodity exchange-traded fund (ETF). It tracks prices of growth-sensitive commodities … and then some.

Now get this: The price of DBC exploded 75% higher in the 12 months after unemployment bottomed at 4.4% in May 2007!

Compare that to the SPDR S&P 500 ETF (NYSE: SPY). It tracks stocks in the S&P 500 Index, and it lost 16% during those same 12 months.

What’s more? DBC didn’t stop climbing until six months after the recession began.

This late-cycle appetite for natural resources means you can use DBC and other commodity investments to profit in the coming quarters, when recession begins to haunt mainstream investors.

Good investing,

John Ross

Senior Analyst, Banyan Hill Publishing

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