FYI | Jan 12 2009
By Rudi Filapek-Vandyck
The outlook for US unemployment is far from rosy and investors should have little illusions the coming months will see more of Friday’s horrible labour data releases. In fact, if history is any guide, Friday’s horrible US job loss data are likely to be revised into worse data at the next labour market update.
This is not necessarily bad news, argues the institutional sales team at BTIG. From an historical point of view, a further deterioration of employment data is consistent with an improving environment for the US equity market, says BTIG, and as such the outlook for US shares might have just improved.
Jobs data are a lagging indicator, therefore, these data are of little assistance with respect to investment decisions once we are well into a cycle.
The team has amalgameted some historical data to underpin this statement.
The current high of 4.61 million continuing jobless claims is still below the peak levels of 4.71 million in November 1982 and 4.63 million in May 1975. Note, says BTIG, the US stock market bottomed in October 1974.
The difference between now and then is that today’s US labour force consists of 155 million people whereas in 1982, the labour force was 111 million people and in 1975, it was 93.8 million. For the current employment environment to be as bad as those recessions, continuing claims will need to rise 42% to 6.5 million to be on par with 1982 and 65% to 7.6 million to be on par with 1975.
History shows that during all recessions since 1970, the S&P 500 index has risen on average 28% from its trough before continuing claims peak, with the strongest rises of 46% and 38% occurring in 1975 and 1982, respectively. On average, the market has bottomed 4.8 months prior to continuing claims peaking.
BTIG states that number is likely understated due to the close proximity of the 1980 and 1981-82 recessions. If one applied the eventual 1982 peak to the 1980 recession, the market troughed on average 9 months before claims peaked.
What this means, explains the team, is that while claims can possibly rise every month this calendar year, this can go hand in hand with equities rallying. The only caveat is 2002, which was a bad year for equity markets following the 2001 recession. In every other case, says BTIG, the US share market continued its rally following the peak in jobless claims.
Also, during each of the recessions since 1970, the unemployment rate has not peaked on average until 6 months following the peak in continuing claims. Just like the earlier example, if one uses 1982 as the peak unemployment rate for the 1980 recession, the lag is 11 months. Once the unemployment rate reaches its peak, it generally plateaus for several months before recovering. By then, history shows, equities have been rallying for over a year.
Turning to the share market, BTIG says the current move from the October 2007 peak to the November 2008 trough was the shortest sharpest correction (52% in 408 days) on record with the exception of March 1937-March 1938 in which the S&P dropped 54% in 386 days.
Even after the Great Crash in 1929, it still took 452 days before the market crossed the 52% mark on the downside on its way to what ultimately would end with 85% losses after nearly three years.
BTIG argues that the conclusion to draw from all the above is that the US stock market has corrected far more severely in a shorter period of time than any of the recessions during the past 40 years. Investors should be able to handle the continued deterioration of employment data in the months ahead. History shows US unemployment is likely to deteriorate further, but that shouldn’t stop the share market from looking forward and moving higher.
