Equity Market rally may have more legs

February 3, 2012

Global Macro

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 one of its lowest levels, 367,000, in a few years to suggest he may not have to as you can see in the chart below from Bloomberg.  

So while neither equities or risk assets roared over night  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 Blog by Bob Bronson of Bronson Capital which looked at the relationship between US initial jobless claims and the S&P 500. (here) which had the following chart in it

Now, I have to say the skeptic in me thought – yeah yeah fitted line 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 definitely 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 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 hey 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, please IF, we see them head back toward 300,000 then we’ll know the economy in the US at least is healing slowly – which will be good for the market in risk assets.

I’ll be watching this space – you should too.

Have a great day

www.twitter.com/gregorymckenna

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

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