Recession Indicator: The Downside of the 2019 Jobs Report

Story Highlights

The U.S. added 266,000 new jobs in November — 30% above estimates.
Yet the unemployment rate signals when a recession might come.
Anticipating an unemployment bottom, John shares a way to take advantage now and profit in 2020.

The proverbial “economists polled by Dow Jones” might want to look for a new day job.

Their estimates for 187,000 new jobs missed Friday’s jobs report by nearly 80,000, or 30%.

U.S. nonfarm payrolls grew by 266,000 in November.

That’s a nice beat, and it helps everyone feel good about the U.S. economy.

That’s OK … for now.

But payrolls are a lagging indicator. What happened last month doesn’t concern me as much as what’s going to happen in the months ahead.

And that’s why I prefer looking at the other side of the monthly jobs report: the unemployment rate.

Take a look at this chart to see why…

Unemployment Rate Chart and Recession

It shows how the U.S. unemployment rate has changed since 1964. The shaded gray areas indicate past recessions. So, as you can see, the unemployment rate forecasts recession before it happens. Information like that can help you make money — and keep it — in 2020.

In a moment, I’ll share one specific trade you should consider if unemployment begins to signal recession.

Recession Will Come, but Not Before Big Gains

The internet’s abuzz with talks of the unemployment rate being at its lowest since 1969.

The low rate of joblessness suggests the economy will keep growing.

Again, that’s great!

But not so fast — the unemployment rate reaches a low point right before a recession.

The above chart goes back 55 years.

The blue line represents the rate of unemployment in the United States. You can see how it dipped back down to 3.5% in November.

As I mentioned, the vertical gray bars on the chart indicate U.S. recessions.

There is a close correlation between unemployment and recession.

I wrote about this a year ago, and I told readers: “When unemployment bottoms, a recession follows. On average, the contraction begins about seven months later.”

That’s powerful.

And that’s why it’s my favorite recession indicator. It’s better at predicting and timing an economic downturn than the inverted yield curve.

Now, don’t get me wrong: I’m not trying to scare you with talk of recession.

After all, scared investors don’t make money.

But we should respect the boom-bust cycle that makes recession inevitable. It says that a bust to clean out excesses, inefficiencies and wasteful investments must follow an economic boom.

With that in mind, here’s a trade for you to consider in 2020 to take advantage of an inevitable unemployment bottom…

An Underappreciated Sector Outperforms

Unemployment bottoms when economic growth begins to slow. Eventually, the economy may even contract.

But the world doesn’t stop turning.

People still use crude oil, copper, steel, silver and gold — commodities — even if companies are cutting workers.

Commodities have already endured low prices (bust cycles) in recent years. This leaves them better-prepared to weather an economic slowdown when it comes.

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

This will blow your mind: The price of DBC exploded 75% higher in the 12 months after unemployment bottomed at 4.4% in May 2007!

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

For comparison, the SPDR S&P 500 ETF (NYSE: SPY) lost 16% during the 12 months after unemployment bottomed.

Unemployment may drift even lower, but it will bottom.

And when that happens, you can use DBC to profit in the coming quarters.

Apex Movement Patterns

One last note: The below chart goes back to the beginning of the bear market in commodity prices. It also shows the rebound that began in 2016.

Apex Movement Patterns Cycle

Our Apex Movement Patterns (AMPs) suggest DBC could climb 33% or more in the next 12 months.

That’s a long time horizon for some. But if you’d like to see our AMPs applied to individual natural resource stocks for shorter-term trades, take a look at how Matt Badiali and I use them to find profit opportunities when stocks are rising — and falling!

Good investing,