Initial Claims and the S&P 500: Slight Movement Northeast (Not Sustainable), but Trend is Still Northwest (Good)
The labor market continues to grow at a slow pace; this week’s Labor Department’s initial and continuing claims figures confirmed the general trend. Weekly initial claims came in at 336K, an increase of 2K over the revised figures from the prior week and continuing claims came in at 3.053 million, representing an increase of 5 K over the prior week.
Over the past year and a half, the begrudgingly moving claims figures have correlated with stronger than expected equity market growth (at least based upon correlating claims improvement to equity market improvement and then backing into where the S&P 500 should be based upon what initial claims have done).
Where has the correlation moved over the past month?
Over the prior four weeks, seasonally adjusted initial claims are down 30 K, representing a decent improvement by historical standards. Over the same four weeks, the S&P 500 is up about 35 points, or about 2 percent.
The decent northwest movement over the past month – the most desirable movement there is – presents the question of how durable the direction movement is for the rest of 2013.
Looking first at the initial claims figures, how much lower can they go? The simple answer is: not much further, with the maximum absolute improvement of about 30 K; unless, of course, you think claims could actually go below 300 K again, something that briefly happened in 2006 and before that briefly in 2000. Initial claims don’t stay below 300 K for very long.
With the initial claims numbers in mind, thinking about appreciation in the S&P 500 over the next couple of years takes on a different view. If S&P 500 to provide strong appreciation in the next couple of years, one of two things must happen: either initial claims will stay below 300 K for a historically long time, or the relationship between initial claims and the S&P 500 will become decoupled. Given that the S&P 500 has decoupled from other fundamental economic values, it wouldn’t be too surprising to see this happen. Then again, it’s not where the probabilities lie.
In all, the initial and continuing claims figures came in generally good today. How much improvement in the initial claims figures is possible over the next couple of years – and thus the predicted relationship with the S&P 500 value – is something worth considering.