The recent correction/downturn in the stock market seems to have taken many investors, both big and small, by surprise. At this point in time, it appears that the American stock market is still significantly over-priced when one compares present earnings to share prices to the levels experienced over the past century and that we should expect further volatility to the downside in the future. Us stock market predictions 2016 can be guessed, but realistically we have the software that does all the hard work for us, and has been very accurate in 2015. The upcoming rate increase must be the most telegraphed initial rate hike in Federal Reserve history.
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. I went back to 1965, which was the start of the initial claims data history and analyzed the 1965-1986 period. 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. As well, the market discussion has moved on from the timing of the first rate hike to the pace of the rate hikes.
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. 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.
While job openings have skyrocketed, both actual hires and quits stalled, and this month both turned negative YoY for the first time since the 1-month 2012 pause. That there were upward revisions to the last 6 months in this index, the above graph shows that, in context, it is not pointing to strong payrolls growth in the months ahead. 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 ). In the context of a strong momentum thrust from a market bottom, this chart is a good road map of what may happen next.