Stock Prices and Unemployment Peaks 15 comments
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I normally have a live and let live attitude toward other people's market analysis. Once in a while, I come across research that seem so misguided that I feel compelled to speak up.
A blogger recently posted an intriguing bit of analysis on a discussion group that I subscribe to and it was entitled 10% Unemployment: A Remarkable Signal for Stocks. He shows the chart below and concluded that “[h]istorically the stock market has performed exceptionally well after unemployment has peaked.”
How do you know unemployment has peaked?
That’s interesting analysis, but how do you know that unemployment has peaked? The latest NFP figures don't seem to be pointing toward any peak in unemployment. By contrast, David Rosenberg of Gluskin Sheff believes that U.S. unemployment is going to see 12-13% before this is all over [emphasis mine]:
There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market…
Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.
So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.
Buyer beware
This is a lesson for individual investors of buyer beware. This analysis sounds like generic boosterism for the stock market. While I understand that investment advisors may have their own agenda in promoting a certain viewpoint, experienced advisors know that success comes from serving their clients’ long-term interests.
Investors and analysts need to learn to thimk!
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Now Cam just needs to start slamming CNBS and all the charlatans trying to convince a shaky and unsure public that the kool-aid is refreshing and delicious.
www.theonion.com/conte...
on time and actionable, Big Dap knows handjobs!
On Nov 12 08:04 AM Mad Hedge Fund Trader wrote:
> ngq If I’ve told you once, I’ve told you a thousand times, stay out
> of those crummy neighborhoods, where the street corners are crowded
> with high priced stocks of dubious moral character wearing stiletto
> heels, fishnet stockings, miniskirts, and shoulder handbags. Sure,
> I know you young traders have needs, think with your hormones, and
> believe you can live forever. But if you absolutely have to go slumming,
> at least use some cheap protection. I noticed today that the January
> 1030 S&P 500 puts were selling at a bargain $19 today. That means
> for a mere $950 you can buy some decent downside protection for a
> $55,000 portfolio that takes you all the way out to January 15, 2010.
> That is bang on the support level that held in the last sell off.
> If you double top here on the charts and go down for a retest, you
> double you money. If yearend profit taking causes us to sell off
> going into the holidays, and we break that support, you make more.
> If the market melts down the day after we flip the calendar page
> to 2010, a distinct possibility, then you hit a home run. If the
> lemmings keep driving this market up every day for two more months,
> then you lose $900, or 1.72% of your portfolio, pennies, really,
> against the huge returns you have booked so far this year. It’s a
> win, win, win, lose pennies trader. I know that the pros that have
> done for a long time put these trades on without even thinking about
> it. It’s all about risk control. Since I am a cheapskate, I only
> like strapping on trades that have a risk/reward ratio overwhelmingly
> in my favor, and with the volatility index today a bargain 23%, this
> fits the bill nicely. Buy your storm insurance when the sun is shining.
Returning furloughed workers, increasing the hours of hourly paid workers, and having others feel more secure in their employment are all big positives for economic activity, and should not be dismissed just because they do not result in the same reduction in unemployment statistics.
"naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began."
But the market is smarter than I am...adn know something I dont so it keeps going up.
I agree, but as with a lot of market commentary that I see,
I feel the perspective ought to be globalized.
The very phrase "jobless recovery" suggests an US-Centric point
of view to me (at least I feel it's read that way here in the US;
maybe Canadian readers have a more global perspective).
I don't think that the current recovery is jobless, unless you
confine your view to the high-wage economies.
It has been endlessly pointed out, especially back when things
were coooking along nicely, that a billion new workers [pick
your sensational statistic] were entering the global workforce.
This process is continuing, and law of supply and demand suggests
something about its consequences: wages should fall.
Of course, the new workers don't see falling wages, they see it
as a rise from zero. But if the overall level of wages falls,
somebody has to see their wages go down. Any guesses who?
This global leveling of wages is a long-term process, probably
decades, but it does not proceed at a constant rate. The whole
economy has its cycles, and on the up cycles, the US worker more
or less holds his own, and on the down cycles he gets killed.
That's exactly what we've been seeing at least since the Asian
financial crisis of '97.
And I think it will continue like that, unless and until the US
learns to work a lot harder and educate its people a lot better,
and the new Asian workers begin consuming more of their new
income and saving less of it. And I don't see many signs of that
at present.
So I don't like the phrase "jobless recovery" much; it tends to
focus one's thinking on national and cyclical trends, whereas
the focus ought to be on the global and secular trend.
I haven't got a better phrase though.
/Jim G.
An explanation for that is once companies can start to raise equity more easily they are more inclined to hire.
By that logic, if the bottom in the S&P 500 was March (which is my position) then unemployment should peak somewhere between December 2009 and June 2010
That was my theory anyway a month ago seekingalpha.com/artic... updated recently on an Interblog: seekingalpha.com/autho...
On Nov 12 07:31 AM tunaman4u2 wrote:
> Unfortunately Bulls see worsening unemployment as a reason to believe
> the Fed will continue to party for longer.
Thank you for referencing my article on your blog and seeking alpha. I enjoyed reading your position regarding my article and I look forward to reading your future posts. Throughout your article you make solid arguments and I completely agree with the conclusion that for investment advisors, “success comes from serving their clients’ long-term interests.” However I believe you may have misinterpreted the premise of my article.
By no means did I want to allude that unemployment has peaked, in fact I believe that it can continue to rise well into the early parts of 2010. I was simply attempting to show how the stock market has behaved historically when unemployment has peaked. Financial markets have been following economic cycles for over 150 years and are linked in a logical, rational and sequential relationship to business activity. Given the current economic environment and unemployment levels I thought that people might find this comparison interesting as well as educational.
To view my previous posts or to obtain more information about my viewpoints of the financial markets please visit www.jimkopas.com
Regards,
Jim Kopas
Pring Turner Capital Group
www.pringturner.com
You're correct, which is why the majority of my equity holdings are either if foreign stocks, or multinationals.
On Nov 12 10:06 AM JWG wrote:
> Cam & Old Trader,
>
> I agree, but as with a lot of market commentary that I see,
> I feel the perspective ought to be globalized.
>
> The very phrase "jobless recovery" suggests an US-Centric point
>
> of view to me (at least I feel it's read that way here in the US;
>
> maybe Canadian readers have a more global perspective).
>
> I don't think that the current recovery is jobless, unless you<br/>confine
> your view to the high-wage economies.
>
> It has been endlessly pointed out, especially back when things<br/>were
> coooking along nicely, that a billion new workers [pick
> your sensational statistic] were entering the global workforce.
>
> This process is continuing, and law of supply and demand suggests
>
> something about its consequences: wages should fall.
>
> Of course, the new workers don't see falling wages, they see it<br/>as
> a rise from zero. But if the overall level of wages falls,
> somebody has to see their wages go down. Any guesses who?
>
> This global leveling of wages is a long-term process, probably <br/>decades,
> but it does not proceed at a constant rate. The whole
> economy has its cycles, and on the up cycles, the US worker more
>
> or less holds his own, and on the down cycles he gets killed. <br/>That's
> exactly what we've been seeing at least since the Asian
> financial crisis of '97.
>
> And I think it will continue like that, unless and until the US<br/>learns
> to work a lot harder and educate its people a lot better,
> and the new Asian workers begin consuming more of their new
> income and saving less of it. And I don't see many signs of that
>
> at present.
>
> So I don't like the phrase "jobless recovery" much; it tends to<br/>focus
> one's thinking on national and cyclical trends, whereas
> the focus ought to be on the global and secular trend.
>
> I haven't got a better phrase though.
>
> /Jim G.