The Jobs Are Back! Ugh!

Companies are hiring, and the unemployment rate is declining. That's the good news, and you've been hearing it for months now. But behind this happy trend is a surprising and, for investors, unfortunate side effect: The stock-picking strategies that worked just a few months ago are losing their effectiveness -- and fast.

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Analysts say many investors, from the pro running a billion-dollar pension fund to the individual saving for retirement, have been sitting in so-called safe-haven stocks. These equities, such as power utilities or firms that sell consumer staples, held their values last fall when the market sank and everyone was worried about credit downgrades, the European debt crisis and a double-dip U.S. recession. But the worst-case scenario hasn't happened -- indeed, the U.S. economy has grown faster than expected, and the stock market has rallied. Since the October 3 low, those safe-haven consumer staples stocks are up 16 percent on average, and utilities are up 9 percent, according to Standard & Poor's. Meanwhile, consumer discretionary stocks -- from appliance makers to clothing chains -- are up, on average, 35 percent, whereas the broad market has risen more than 27 percent. "If you are parked in the same stuff you were in September, you are missing out," says Eric Weigel, director of research at investment firm Leuthold Weeden Asset Management.

Nevertheless, many pros say, investors who are still waiting on the safe-haven pier haven't missed the boat entirely. If the economy keeps improving, many of the stocks that have done well already could keep rising, as Americans finally loosen their purse strings to do such radical things as take a vacation -- or fix that long-leaking toilet in the basement. "More jobs leads to more spending, and more spending leads to more jobs, and you get yourself into a virtuous cycle -- which is the hope," says Bob Doll, chief U.S. equity strategist at BlackRock.

Broadly speaking, shares of so-called discretionary stocks traditionally are the natural place to look as the economy recovers. But given the run-up in some of these stocks, investors have to be a little more selective, says Brad Thompson, who helps manage $8 billion in assets as director of research at Frost Investment Advisors. Since much of the jobs growth is coming in traditionally lower-paying industries, he favors budget-oriented retailers versus department stores. Steadier paychecks also could inspire Americans to make long-postponed renovations in their homes, which could boost shares of firms such as Bed Bath & Beyond (BBBY), The Home Depot (HD) and Lowe's (LOW) . These home-related stocks could take a while to rise though; economists don't expect the U.S. housing market to rebound particularly fast.

Follow the Paycheck

Each month, the government reports not only on how many jobs were added but also on which industries added them. Brian Angerame, who comanages funds for ClearBridge Advisors, uses that knowledge and other factors to pick stocks. Sure, some of the extra jobs might dent profit margins in the short term, but the companies are hiring because they expect to sell a lot more goods in the future, pros say. Here are two industries on hiring sprees.

ENERGY PRODUCTION:

The number of people employed in the hunt for oil and gas is up nearly 16 percent over the past year. Angerame likes energy firms Pioneer Natural Resources (PXD) and Whiting Petroleum (WLL) .

TECH:

Web-related businesses have been on a hiring spree, with employment in information services up by 11 percent over the past year. Angerame recommends two tech equipment makers: Nuance Communications (NUAN) and F5 Networks (FFIV) .

With summer fast approaching, the newly employed might finally splurge on a vacation after years of going without. These excursions won't be lavish safaris or over-the-top spa getaways (the 1 percent crowd already has recovered its travel wanderlust); expect a lot more trips to Disney World or budget-friendly cruises, analysts say. That bodes well for some leisure companies, says Matt Freund, senior vice president of investment portfolio management at USAA.

Since much of that spending may end up on credit cards, fund managers are scooping up shares of consumer finance firms like Visa (V) and MasterCard (MA) . Trading at an average of 13 times earnings, big financial stocks make up one of the cheapest economically sensitive sectors. Weigel also favors regional banks, because some of the loans those banks have written off as uncollectible suddenly might not look so bad as more people get jobs. Intrepid investors like Brian Angerame, comanager of the ClearBridge Mid-Cap Core and Mid-Cap Growth funds, see opportunity in more direct housing-related plays, such as select home builders. With the economy improving, millennials stuck living in their parents' attics or with a houseful of roommates may go get their own place. "People are underestimating how lean these companies have gotten, so with just a little demand, you will see their results beat expectations," Angerame says.

Of course, if the job spurt begins to sputter, many of these stocks -- especially those that have already run up -- will probably falter. What's more, investors also need to worry about the economy improving too fast, strategists say. If the economy keeps chugging ahead, the Federal Reserve may back away from further stimulus. At that point, the market might start to fear the long-term impact of that old bogeyman, inflation, says Jason DeSena Trennert, head of investment research firm Strategas Partners. With that in mind, Trennert is eyeing technology stocks that both hold heaps of cash and can still benefit from an uptick in spending. "That may be a safer way to play an improving economy," he says. Computer-equipment firms, such as Dell (DELL) and Hewlett-Packard (HPQ), may be well-placed, analysts say. After all, if businesses feel comfortable enough to hire, they may also tap their piles of cash to replace old PCs.

But for now, even those pros with reservations are having a hard time ignoring the trend. Not only has unemployment eased, but bank loans to businesses have also been on the upswing since last fall. That bodes well for the continuation of economic improvement. If the nation can grow at a 3 percent or better annual clip for a year or more (not outside the realm of possibility, according to some analysts), unemployment should fall to a more comfortable level, says Asha Bangalore, economist at Northern Trust. And if the growth trend doesn't shoot straight up, that might be good news for investors who have yet to sub out their safe-haven stocks for more economically sensitive ones. A calm stock market, or even a small decline, could be an opportunity to rebalance an entire investment portfolio. "You don't need to chase the stocks," says Freund. "There will be opportunities to play them over time."

Corrections & Amplifications In the magazine version of this story, Whiting Petroleum was identified as a refiner. It is an energy exploration and production firm.