The stock market’s price/earnings (P/E) ratio is probably the most popular and straight-forward measure of stock market value out there. As regular readers are aware, this Humble Student of the Markets blog will become a subscription driven site on December 1 (see Why this isn’t investment advice (and a site update) ). The new site is live now at , Come by and take a look and please change your bookmarks accordingly. As regular readers are aware, this Humble Student of the Markets blog will become a subscription driven site on December 1 (see Why this isn’t investment advice (and a site update) ). The new site is live now at , Come by and take a look and please change your bookmarks accordingly. Based on this analysis, the US equity market should have a bullish tailwind this week.
Doug Short put this data set into much better context with this chart of initial claims normalized by the size of the civilian labor force, which is another indication of how tight the labor market has become. Sure, the 20 year chart of weekly initial claims data has been highly correlated with stock prices, but this correlation hasn’t been as strong in other past periods. We have seen two weeks of heavy insider buying as the stock market has pulled back and consolidated its gains.
Then something funny happened in the mid-1980s as the recovery took hold – stock prices and claims went their separate ways as the inverse correlation broke down. Put it another way, the economy was improving and the labor market tightened, but the stock market shrugged off the labor market effects because of an improving growth outlook. Initial claims started to rise (recall the inverse scale) in the late 1980s, but stock prices did not break down until about a year afterwards. This is an international sector – the overall global market is more important than the domestic market.
Moreover, there was another episode about 1995 when claims rose but stock prices went up – until the inverse correlation re-asserted itself after the NASDAQ crash. Here is what I think is going on. I concur with the more nuanced interpretation of current labor market conditions from New Deal democrat when he wrote that he was underwhelmed by the JOLTS report because hires were not rising along with job openings. In the context of a strong momentum thrust from a market bottom, this chart is a good road map of what may happen next.
Investors should therefore be positioned accordingly in late cycle sectors such as the capital goods and hard asset/resource sectors of the market (see my post Profiting from a late cycle market ). I have also been advocating a rotation into late cycle commodity sensitive sectors (see Profiting from a late cycle market and Global reflation = Buy risk (and cyclicals) ). That trade setup continue to develop. We have been in a secular bear market since 2000, with the Dow Jones barely level with it’s 2000 level.