- Bob Elliott, founder of Unlimited Funds, says the US labor market is exceptionally strong.
- But investor expectations are also very high, leaving little opportunity in stocks, he said.
- Instead, Elliott recommends shorting long-end bonds, where strong expectations are not priced in.
Concerns that the US labor market is starting to weaken have risen in recent weeks, with the 175,000 jobs added in April coming in well below consensus.
In the same vein, with the unemployment rate ticking back up to 3.9%, its three-month moving average is now up 0.37% from recent lows, approaching the 0.5% threshold that signals the US economy is in recession, according to the so-called "Sahm Rule."
But there's no need to worry about the health of the job market or the overall economic expansion, according to Bob Elliott, the founder of Unlimited Funds and a former executive at Bridgewater Associates, the largest hedge fund in the world by assets under management.
Elliott said the uptrend in the unemployment rate can be attributed to growing participation in the labor force. Evidence of this lies in the fact that layoffs have not spiked.
"Just to be blunt about it, I think people have been looking for a turn in the economy and looking for signs of a turn in the economy for several years now. And this, in many ways, is just another flavor of that," Elliott told Business Insider. "175,000 jobs, just as an example, is more than enough to keep the labor market tight. And what loosening there has been has been supply-driven loosening."
Another common worry among investors is the risk that elevated interest rates pose to the labor market and overall economy. As the consumer price index has remained sticky, staying above 3% since coming down from 9.1% highs in 2022, the Federal Reserve has been forced to keep interest rates high out of fear that cutting rates would flare up demand and price growth again.
But Elliott brushed off these concerns, saying that the economy appears more immune to higher rates this cycle as consumers continue to spend as their pay rises.
"I think a lot of people, particularly the Fed, are struggling with the basic idea of how they can perceive money as being so tight and the economy basically chugging along largely unaffected by what's going on with interest rates," Elliott said. "And the core reason why that is is because we have an income-led recovery and an income-driven recovery, which is very different from most of the cycles that people have seen in their professional careers."
That difference is that prior cycles have been driven by lending, Elliott said. Lending growth fueled economic expansions and drops in lending led to economic contractions. Lending has fallen to recessionary levels over the last year and a half, Elliott said, but strong spending has kept the economy afloat.
"People's wages and salaries are increasing by 6% a year, and they're taking that money and spending it at a rate of about 6% a year, and that is a very sustainable expansion," he said. "It's also one in which monetary policy is not particularly influential because if all you're doing is spending out of your income and not incrementally borrowing, interest rates can be elevated, and it doesn't make much of a difference for your day-to-day activity."
Elliott's 2 top trades right now
Interestingly, Elliott is not particularly bullish on stocks at the moment despite his optimistic view of the economy. This is because any investor concerns about the economy have not worked their way into stock prices yet, and expectations for GDP and earnings growth remain very strong. GDP growth expectations entering 2024 were under 1%, he said, and that has risen to 2.5%. Meanwhile, earnings are expected to grow by 17% year-over-year.
Elliott said the long end of the bond market is an area where investors have not yet priced in strong growth. As such, he expects long-end bond yields to spike further and their prices to fall, creating a short opportunity.
"Short bonds, I think, and yield curve steepening, is probably the most interesting opportunity in the market right now," he said. "We have term premiums that are at the 10-year average at a time when inflation is way above the 10-year average, the unemployment rate is way below the 10-year average, and the economy is much stronger than it has been on average in the post-GFC period."
One way to gain short exposure to long-end bonds is through funds like the ProShares UltraShort 20+ Year Treasury (TBT) and the Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV).
Another opportunity that Elliott likes right now is in gold. He said it can act as a hedge against the Fed cutting rates too early with the economy still strong.
"In that case, the way you protect yourself from that dynamic is not through bonds, because the extent that they run easier monetary policy than is appropriate given economic conditions, you would typically see long yields rise, not fall," he said. "And so your better protection on that is to hold gold, which would likely be the largest beneficiary from the Fed being too easy relative to expectations."
Investors can gain exposure to gold through funds like the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU).
