Employment Data Leading or Lagging?
When it comes to analyzing investments many of us end up trying to form fit our personal outlook to our analysis, rather than maintaining objectivity. While those that hire professionals to recommend investment strategies may not be better off as they often end up having their portfolios form-fit to the analysis that dovetails with their investment firms current believes. An example of a common held believe that can influence one’s outlook and strategy is that “the stock market leads the employment rate”, which makes sense on more than one level. More often than not the people that mention this however, are those who make thier living best when stocks are doing well. What happens though if the stock market, like so many other markets, misleads investors, while the employment numbers prove to be more telling of what the future holds? The two charts below display a very definite divergence between the stock market which seems to be anticipating a recovery of jobs, and the employment rate which continues to fall — both charts are up to date. I’ve been asking myself lately that given the sharp drop-off in jobs, and other hard economic data, can stocks continue on their current cheery path?
Teresa at Trading University pointed out an article to me yesterday which she found on Yahoo Finance. The article was titled “CEO’s Rate Obama’s Performance”. There was a contribution by Pimco’s CEO Mohamed El-Erian who said: “On the negative side, the jobs picture is worse than anticipated, and unemployment itself is becoming big policy challenge. It’s going from being a lagging indicator to being a leading indicator”.
And the two charts below are painting that same picture. From an analysts stand point either jobs stabilize and start to actually grow — the current guesstimate for Friday’s non-farm payroll is -330K following June’s -470K , or the stock market gives up some of its 35% gains over the last 6 months.
Now I know that many of the U.S. jobs lost over the last two years are not coming back. And the U.S. is still in the process of settling into the global economy after having been above it for so many decades. But after six months of diverging stock prices and jobs data the non-farm payroll data takes on even more than its usual influence.
We will likely have a more clear picture of what will happen closer to the Fall when there is generally a bearish seasonal influence. If stocks can buck the seasonal, with economic data confirming, then it might be time to start scouting out the buy signals. For now however, I’m leaning toward a resumption of the intermediate-term on that Monthly S&P chart, which is down.
El-Erian’s firm by the way are bond investors.
Jay Norris
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To see a chart of the Total Non-Farm payroll in relation to the Stock market itself is certainly an eye-opener that lends to facts which will help us not to form fit our own veiw. And a very in-dept write up which i certainly enjoyed reading, I dare say I will be reading it again so I can absorb it. Excellent Contribution in light of where we stand in the current economy outlook.
(Ascot, UK)