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Surprise ETF Winners Post Job Data

Zacks Equity Research

The U.S. labor market latched on to strong job gains in November, sealing the chances of a Fed lift-off as early as in two weeks. The ‘headline’ jobs number came in at 211,000 for November, breezing past the estimated 200,000. In fact, the data for September and an already-sturdy October were also upgraded to reflect 35,000 additional jobs than earlier revealed.

 

Notably, wages and the unemployment rate were also steady in November. The unemployment rate remained unchanged at 5% -- a more than seven-year low level. The monthly tally for the last three months now averages at 218K.

 

However, the labor market has room for further improvement. This is because the underemployment rate, which reflects part-time workers who’d wish a full-time placement and people who want to work but have stopped searching, inched up to 9.9% in the month from 9.8% in October, per Bloomberg. The labor forces’ participation rate remains at a multi-year low of 62.5% (minutely up from October). Average hourly earnings are rising off late but are far from creating wage inflation.

 

The nudge in the underemployment metric, widely viewed as the Fed chief Yellen’s preferred benchmark for measuring the labor-market condition, hints at a slower rate hike trajectory once the Fed embarks on this path. After all, the economy is yet to attain the Fed’s 2% inflation goal. The economy has failed to reach that target after April 2012. Fed officials now expect a 74% probability of a hike, while the effective funds rate post hike is likely to be 0.375%, per Bloomberg.

 

Market Impact

 

While the broader market has already settled in with the looming liftoff this month, it has now started analyzing the pace of the rate hike. As a result, a good-but-not-outstanding job report, laden with a few loopholes, has strengthened the chance of a slow and small rate hike trail ahead.

 

This produced a handful of surprise winners and losers post November job data. The belief is that when rates rise or a chance of a rise is higher, the greenback strength puts pressure on commodities and the bond market underperforms. But after the November job report, we noticed certain changes in sentiments in the investment dynamics as the market is now focusing more on a sluggish rate hike, not just the hike itself.

 

Given this, we have highlighted ETF winners and losers from the November payroll report.

 

Winners

 

SPDR Gold Shares (GLD)

 

Gold bullions plunged to a six-year low level on a rising greenback and muted inflation globally. However, the bullion tested many lows already and the lift-off seems almost priced in, the bullion reversed its trend post job data. The bulls are back in the gold market as many analysts believe that the Fed will not react fast after initiating the policy normalization process.

 

This gave the gold bullion ETF GLD a gain of over 2.2% on December 4, the day a steady job report published, defying the traditional investing theme. The fund added about 0.1% after hours. GLD is down over 8.4% so far this year (as of December 4, 2015). GLD has a Zacks ETF Rank #3 (Hold) (read: How to Short Gold and Silver with ETFs).


iShares 20+ Year Treasury Bond (TLT)


This is a beneficiary of the positive economic momentum. Yield on the benchmark 10-year Treasury note dipped 5 basis points from the previous day to 2.28% on December 4 whereas yield on the 20-year note declined 7 bps to 2.65% on the same date. As a result, treasury bonds rose after the payroll data. Long-term U.S. bond ETF TLT was up about 0.9% in the key trading session. The fund has a Zacks ETF Rank #2 (Buy) (read: Rate Hike in the Cards: How Will Bond ETFs React?).


iShares Select Dividend (DVY)


This high dividend ETF also flouted the traditional conviction that income investing slackens in a rising rate environment. Since yields on longer-term treasury bonds fell, investors rushed toward high income instruments. DVY yields about 3.29% (as of December 4, 2015) and gained about 1.6% on December 4, 2015 (read: 3 High Dividend Stocks & ETFs to Buy).


PowerShares DB US Dollar Bullish ETF (UUP)


A healing job market and economic improvement are attracting more capital into the country and appreciating the U.S. dollar. UUP is the direct beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Though further strength in the greenback now looks limited after months of steep ascent, UUP advanced over 0.7% on December 4 (read: Dollar May Hit Parity with Euro: Bet on These ETFs).

 

iShares MSCI Emerging Markets (EEM)

 

Emerging markets normally fall out of favor in a rising rate environment as investors dump these high-yielding, but risky, investing tools for higher yields at home. However, the emerging market ETF EEM was up about 0.7% on December 4 and lost about 0.1% after hours. EEM has a Zacks ETF Rank #3 (read: 5 Broader Emerging Market ETFs Surging This Quarter).


Loser


SPDR Barclays 1-3 Month T-Bill ETF (BIL)


This product offers exposure to the short end of the yield curve by tacking the Barclays 1-3 Month U.S. Treasury Bill Index. Since the Fed hikes the short-term interest rate, yield on the benchmark 6-month Treasury note rose 4 basis points to 0.49% on December 4 and will likely to remain stressed in the coming days.

 

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SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ISHARS-20+YTB (TLT): ETF Research Reports
 
ISHARS-SEL DIV (DVY): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
ISHARS-EMG MKT (EEM): ETF Research Reports
 
SPDR-BC 1-3M T (BIL): ETF Research Reports
 
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