Investing in a Soft Landing: Sector Rotation Opportunities Amid Rising Continuing Jobless Claims

The U.S. labor market is at a crossroads. While initial jobless claims have dipped to levels not seen since early 2021, continuing jobless claims—the number of people still receiving unemployment benefits—have surged to 1.903 million, the highest since November 2021. This divergence signals a labor market that is neither overheating nor collapsing but rather settling into a "soft-landing" scenario, where growth slows but avoids a sharp downturn. For investors, this presents a unique opportunity to rotate into sectors that thrive in a moderate, stable environment while hedging against risks in cyclical industries.

The Labor Market's Dual Narrative

Continuing jobless claims are a critical barometer for sector rotation strategies. When claims rise, it often indicates that workers are staying unemployed longer, which can signal slower hiring in certain industries. However, the fact that initial claims (new applications) have fallen to 219,000—a post-pandemic low—suggests that layoffs are easing. This duality reflects a labor market where demand for labor remains strong in some sectors but weak in others. For example, industries like healthcare and education have seen job gains, while manufacturing and government employment have contracted.

The four-week moving average of continuing claims stands at 1.957 million, a 4,750 increase from the prior week. This trend suggests a growing cohort of long-term unemployed individuals, who are more likely to seek essential services like healthcare and government assistance. Meanwhile, sectors reliant on rapid hiring—such as construction and retail—face headwinds.

Sector Rotation in a Soft-Landing Scenario

A soft landing favors defensive sectors that provide consistent demand regardless of economic conditions. Here's how to position your portfolio:

1. Healthcare and Consumer Staples
   The rise in continuing claims correlates with increased demand for healthcare services and essential goods. With long-term unemployment at 1.6 million, more Americans are likely to rely on healthcare and food services. The healthcare sector has already shown resilience, with job gains in June 2025 (+39,000), and consumer staples remain a haven in uncertain times. Investors should consider ETFs like the SPDR Health Care Select Sector ETF (XLV) or Consumer Staples Select Sector SPDR Fund (XLP).

2. Utilities and Public Services
   Utilities are another defensive play, as demand for energy and water remains stable. Additionally, government programs to support the unemployed (e.g., expanded unemployment benefits) could boost public sector employment. The iShares U.S. Utilities ETF (IDU) offers exposure to this sector.

3. Avoid Overexposed Cyclical Sectors
   Sectors like industrials and financials, which rely on rapid hiring and economic growth, face risks. For example, the federal government's ongoing layoffs under the Department of Government Efficiency (DOGE) have reduced claims under federal programs but signal broader hiring caution. Investors should tread carefully in these areas, as rising continuing claims may indicate weaker demand for labor-intensive goods and services.

Long-Term Outlook and Strategic Adjustments

Economic models project continuing claims to trend toward 2.01 million in 2026 and 2.04 million in 2027, suggesting a gradual normalization of unemployment. While this may seem concerning, it aligns with a soft-landing scenario where growth remains steady but modest. For now, investors should:
- Monitor the Federal Reserve's response to inflation and labor market data. A cautious Fed may keep interest rates stable, supporting defensive sectors.
- Watch for sector-specific risks, such as corporate layoffs in tech or manufacturing. For instance, Intel's recent cuts highlight vulnerabilities in capital-intensive industries.
- Rebalance portfolios to prioritize sectors with low volatility and high demand, even as the market digests mixed labor data.

Conclusion

The U.S. labor market's mixed signals—low initial claims and high continuing claims—underscore a soft-landing trajectory. By rotating into defensive sectors and avoiding overexposed cyclical industries, investors can position themselves to weather both economic and policy-driven uncertainties. As the Federal Reserve navigates its next move and corporate America adjusts to a slower hiring pace, a focus on resilience—not speculation—will be key to long-term success.