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August 11, 2012 - The Only Investment Indicator You Need - By Zacks Investment Research
By: John Blank
(Note from Steve Reitmeister, Executive VP of Zacks.com:
I tapped our new Chief Equity Strategist, John Blank Ph.D., to give you some timely investing wisdom. I think you will quickly see why we are so happy to have him on the Zacks team working in your best interest.
Best Regards, Steve (aka Reity)
Every investor understands the intimate relationship between the economy and stock market.
Healthy Economy Ahead = Rising Stock Prices
Faltering Economy Ahead = Look Out Below!
Unfortunately every month there are countless economic reports to sort through. Often they have conflicting information about the trend in place. And to make matters worse, my fellow economists never seem to be in agreement.
So what is an investor to do?
You must learn to pass judgment on the U.S. economy yourself. Gladly there is a simple system I use that does very well in this regard. Read on to learn how to employ it in the future. Plus I share my current outlook for the economy and stock market given this information.
The Only Indicator You Need Is . . .
Non-Farm Payroll data!
There is no second place here. Why? Monthly payroll data gives the best read on the nation's employment situation. As such it is a comprehensive "co-incident" indicator in economist-speak. This means it accurately takes the current pulse of the entire U.S. economy, without any further help.
One thing you should also understand: Governments create this number for their own consumption. Our President and National Security Council, among others, get the monthly payroll number a day or two before stock markets do. That is how important it is.
For an investor in stocks, the national payroll number is the best insight you have into how ALL companies are doing. Simply stated; When companies are collectively prospering they are inclined to boost their payrolls, which boosts the payroll of the nation, which boosts the economy further.
The Federal Government publishes this information the first Friday of each new month at 8:30am ET.
The Good, the Bad and the Ugly
To figure out what a "good" payroll number is, we need to turn to the Civilian Labor Force number of 150 million. It grows at 1% a year. That means 1.5 million people come into the U.S. work force each year. Divide by 12 months and we have +125,000 as the "lukewarm" number.
Below +125K and the economy is losing the chase.
Above +125K and the economy is doing OK.
Above +200K is the preferred number for an economy doing 3%+ real GDP growth.
The other figure to keep in mind is +/- 80,000. That is what is known as the "standard error" of payrolls. When the U.S. economy gets an early reading below +80,000 in a preliminary Payroll number, we could actually be in a contracting economy and not know it yet.
Something below -10,000 from the Revised Payroll number is where you start to worry. It is important to wait two months in order to see two consecutive actual negative Revised Payroll numbers because you don't want to make a huge investment decision based on a faulty statistic.
Getting a Jump on Monthly Employment Data
To predict this monthly number before it is released, all you have to do is keep tabs on the weekly unemployment benefits claims. The simple rule to follow is four weeks of unemployment claims numbers make up a payroll month.
Think of it as the Chinese Abacus of Investing.
For example, the four weekly claims numbers improved from 385,000 on average in May/June towards 360,000 in July -- even 350,000 in some weeks. It was clear from this information that the July payroll number was going to be much stronger than May and June. You don't have to go any further than that to understand what is happening with the economy and its read through to the stock market.
What is this Indicator Telling Me Now?
The last week in July saw claims nicely down to 365,000. Plus the first week of August came in at 361,000. That tells me we are likely to average 360,000 in claims each week in August. So expect a reading of +160,000 for August Payrolls as we did in July.
If that comes to pass, that means the end of the world is not here as many suspect. The stock market will likely rise. It is that easy.
What to Do Next?
If you have enjoyed great success swimming in these treacherous market waters before, then continue forward with the strategies that worked for you.
If your track record is "less than stellar", then it's vitally important to get some timely advice. Not just about how to sell some riskier stocks to thwart heavy losses. But also where to look to generate profits at this time. We've done this very successfully in the past and look forward to helping with it going forward.
That is why our team at Zacks has opened up all of our portfolio recommendation services for you to get all of our advice and recommendations when you need it most.
See All Zacks Commentary, Advice and Recommendations
Happy investing, John Blank
John Blank is the new Chief Equity Strategist for Zacks. You will find his valuable insights on Zacks.com and in the soon to be released Market Strategy report that is part of the Zacks Premium service. The best way to gain access to his insights, and all of those from fellow Zacks commentators, is through a Zacks Ultimate trial. There you will discover all of Zacks' portfolio recommendation services. Learn more about Zacks Ultimate now.