US jobless claims key to S&P

Fed Chairman  Bernanke warned about the pace of recovery and said he wouldn’t trade-off inflation for jobs overnight but initial jobless claims printed a lower level at 367,000. The below chart suggest that the Chairman may not have to face that bind in a few years:

So while neither equities or risk assets roared overnight, the  Australian Dollar did hold above 1.07 , the Dow Jones was up marginally as was the S&P 500 but there is reason to believe that as the US Employment market slowly stabilises and improves then so to will the current equity market rally remain in place.

Well at least that is what  the guys at Bronson Capital reckon anyway.

I stumbled upon a story on the Big Picture by Bob Bronson of Bronson Capital which looked at the relationship between US initial jobless claims and the S&P 500 which offered the following chart:

Now, I have to say the skeptic in me thought ‘yeah, yeah’  so I ran a couple of longer term charts on Bloomberg.

This one below is from 2006 till now:

Clearly Mr Bronson is right – on the face of it there is a coincident relationship between the S&P 500 (pink line) and the level of weekly jobless claims (white line) and their 4 week moving average (green line) during this GFC.

Looking longer term we see in the next chart that there is definitely a relationship but it is weaker through the early part of the last 2 decades than it has been lately. But you can also see it’s not just the GFC either – it has worked pretty much for all of this century:

Now I have to be honest, I have always fairly dismissed Jobless Claims as a direct indicator of anything really when it comes to asset market returns so I have been enlightened by the guys at Bronson Capital. Usually I just look to non-farm payrolls which is out tonight and which I think is the single most important economic indicator on the planet. Perhaps that just shows I’m a bit doctrinaire with my thinking but we learn something new every day and I think this one is really important. This is particularly the case when you think about the fact that US households drew down on their savings to consume in the latter half of last year and so less job losses and more job creation would be a real boon for the economy.

The question is where to now – if jobless claims turn tail and start to rise again then equities and risk assets are likely to follow but if we see them head back toward 300,000 then we’ll know the economy in the US is healing slowly – which will be good for the market in risk assets.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation


      • looks to me like its at the stage where the recovery starts to feed off itself and you get the upwards spiral. housing markets stable and improving. decent private sector jobs growth. governement jobs layoffs mostly over so this will no longer be the drag it has been. falling UE benefits lessening the drag on govt. more people with jobs spending more money creating more jobs onwards and upwards. obviously not confirmed yet but this is how they start. also from a mass group pshycology point of veiw. i think americans are getting to stage where they are sick of being negetive and miserable about what happenned and are staring to put it behind them.

      • I have been watching the weekly jobless numbers in the US for years now. We are seeing some initial signs of life in their housing industry, Households have paid down debt, and they have savings levels not seen in years.

        “Stung by the loss of $2.81 trillion in their net wealth, U.S. households paid down their debts in the third quarter for the first time since at least 1952, the Federal Reserve reported Thursday. As of Sept. 30, households’ total outstanding debt shrank at an annual rate of 0.8% from $13.94 trillion to $13.91 trillion, the Fed said in its quarterly flow of funds report. It’s the first decline in household debt ever recorded in the report. Households paid off more mortgage debt than they took on for the first time on record. Mortgage debt fell at a 2.4% annual rate to $10.54 trillion. Other consumer debts, such as credit cards and auto loans, increased at a 1.2% annual rate in the quarter to $2.6 trillion. Total U.S. domestic nonfinancial debt increased at a 7.2% annual rate, boosted by a postwar record 39.2% increase in debt taken on by the federal government.”

        Ben is rumoured to be looking at QE specifically targeted at housing (although he denied that last night)

        I think there is more likely to be an upside surprise than a downside surprise.

      • Yeah,Lots of stuff about to read..n say,I read a story in the paper the other day called “Spies Trawl social networking sites”…it was about a director of SR7..His name was Peter Fraser…I’m interested is that you Peter..or another Peter Fraser
        Thanks DFM

      • “US fiscal sustainability” It’s not the first time Ben has mentioned it, and he talks getting closer to a debt threshold. It’s true that there are signs of some recovery in the US, and maybe if the Republicans win the Presidency and a greater control of congress they can turn things around. My US banker mate says there will be no recovery until people can afford to borrow for housing, and it’s much worse than we read according to him. I believe the US can turn things around, but not under the current government.

      • have you ever been to and spent time in japan? im willing to bet you havent. Your obsession with the nikkei is odd but if you had been there you would realise there is nothing similar about western culture / economies and the japanese culture / economy. so what is yout point?

  1. Interesting relationship DFM.

    Why not title the post “S&P key to US jobless claims” and look at the relationship from that way around?

    Would explain why Uncle Ben and his cronies are endlessly trying to goose the stock market.

  2. DFM,I am confused, please explain more the following:
    “…if jobless claims … start to rise again then equities and risk assets are likely to follow …”
    Does that mean the traders love and treat as a good news the rising jobless claims, because they can make more money with riskier assets? If this is what the traders, e.g. markets, like that means they are cheering when other people are struggling to find jobs and are suffering financially. Then how could someone expect the unemployment to be solved by creating more jobs by the people with the big money? I am very confused.

  3. The US middle-class has just finished handing generations of savings over to the financial world.

    Equity volumes are way down, housing is smashed, household savings have been punished – If the economy recovers it will have to be on the back of debt fuelled growth. (Companies are cashed up and healthy however…)

    I’m just finding it hard to believe the US consumer will quickly double down for another go just because the Fed can get the banks cashed up to lend again.

    • Yep – there has been a fundamental global shift over the past decade (three really), and that is a transition from manufacturing to service based economies – especially financial services. But the brutal reality remains that there has been on ongoing war against the unit value cost of labor, either technology, manufacturing, or services with financials even outsourcing now – not to mention engineering, IT – everything.

      The companies are cashed up because they have accumulated vast amounts of wealth – the only way to continue things is to release this wealth back into the hands of the consumers – yes , redistribution, in either the form of increased wages or some new form of boom such as the technology boom.

      Without an injection into the consumer class – consumption simply will not rise – Henry Ford saw this basic fundamental reality almost three quarters of a century ago.