Timing the Market with Jobless Claims

Key Takeaway:  Jobless Claims are strongly correlated with the S&P 500.  Users can leverage the data to

  • Predict Bull or Bear inflection points
  • Time market entry points
  • Determine magnitude of market moves

Leveraging the Correlation: Inflection Points

The following charts plot year-over-year growth in the S&P 500 and the inverse of Jobless Claims.

How to use the chart:

  • Not Seasonally Adjusted Claims: To avoid distortions caused by seasonal factors, data is year-over-year growth in unadjusted claims
  • Inverse Claims: The data is the inverse of claims.  As a result, growth in claims on a year-over-year basis is charted as a falling line instead of a rising line.
  • The black line: the point where jobless claims equal the previous year's claims.  Above the line means jobs conditions are improving (claims are dropping Y/Y), below the line means worsening conditions (claims are increasing Y/Y).

Three inflection points mark the past 9 years

Point 1: December 2006

Claims exceed the previous year's at an accelerating rate.  Shortly, the S&P 500 growth turns negative.

Point 2: March 2009

Claims stop accelerating.  Shortly, the S&P 500 begins to surge.

Point 3: April 2010

The rate of claims improvement stops accelerating and begins to ebb slowly.  The S&P 500 stops surging and growth is slow

 

Key Takeaways:  Certain characteristics of Jobless Claims make them safe trigger points for entry/exits into the bond and equity markets

  • Strong correlation: Jobless Claims rate of growth inflection points match those of the S&P 500 (leading by several months as the market tends to overshoot)
  • Predictable: inflection points are not sudden but arrive at the end of a long, clear trend
  • No need to wait for the inflection point: Timing can be done after confirmation of trend reversals.  On the other hand, one can prepare in advance 
 

Leveraging the Magnitude

Jobless claims also predict the scale of market growth.
 
 
Three growth phases mark the past 9 years
 
Phase A: Jan. 2005 - Jan. 2007
Only minor Jobless claims improvement.  S&P 500 grows only 100 points.
 
Phase B:  Feb. 2007 - March 2010
Major surge and subsequent fall in claims.  S&P 500 collapses and rises in similar scale.
S&P 500 recovers 386 points.
 
Phase C: April 2010 - present
Jobless claims growth improves at a slower pace.  S&P 500 growth is similary small in scale (70 points).
 
Key Takeaways: Jobless Claims indicate the magnitude of future S&P 500 moves.
  • Most of the S&P 500 loss came as Jobless Claims surged
  • Most of the S&P 500 gains came as Jobless Claims reversed dramatically
  • Periods of minor growth in S&P 500 are predicted by minor improvement in the Jobless Claims conditions

Key Point #1: Profit Growth Drives Jobless Claims and the S&P 500
Key Point #2: Jobless Claims will lead the S&P 500
Both indicators are a function of corporate profit growth.  Companies hire/fire based on potential profit growth.  The S&P rises based on actual and perceived profit growth.
The S&P will lag jobless claims because jobless claims are a higher frequency data point.  By the time the market perceives and responds, companies have already begun managing labor resources (hirings/firings).
 
Current Jobless Claims Signals
  • Continued S&P 500 growth:  At 109%, the rate of improvement in jobless claims remains comfortably in positive territory.  S&P 500 will continue to rise.
  • Limited S&P Growth: At current levels, S&P 500 will peak around 1370 (depending on the rate of claims deceleration)
  • Short Duration: Unless something dramatically changes in the labor market, the next inflection point will be bearish and it will be within the next 12 months.