Economic Fundamentals Drive Equities Higher

by: Calafia Beach Pundit

High-frequency data continue to reflect slowly improving economic fundamentals. But since interest rates are still priced to a recession, equity prices are likely to continue to rise as long as there is no sign of a new economic downturn.

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Click to enlarge

The first two charts show seasonally adjusted unemployment claims on a weekly and four-week moving average basis. However you look at the data, claims have reached a new low for the current business cycle. This is consistent with the pattern of every business cycle. This recovery has been miserably slow, but it is ongoing.

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I first showed this chart is a post back in October 2011 (and many times since then). At the time, the market was beset by fears of a eurozone crisis, and my point was that those fears were overblown because the fundamentals of the U.S. economy -- as reflected in the ongoing decline in unemployment claims -- were still improving. That's still the case today.

As the above chart shows, equity prices have been tracking the improvement in claims throughout this recovery. Equities offer returns that are too attractive to resist as long as the economy fails to deteriorate, especially when compared to the extremely low yields on cash and Treasuries.