More economic numbers came out this morning. The big one was the fact that there were 80,000 jobs lost last month. The estimate was for 50,000. The unemployment rate ticket up from 4.8% to 5.1%. The Dow futures were up 100 before the number and are now even.
This got me thinking how much of these numbers are actually correlated to the stock market performance. Many are not at all. They are just headlines. But, the unemployment rate is very correlated to how the S&P 500 performs. I’d say it’s a coincident indicator. In other words, it doesn’t help you for the future but rather it moves in step with the market. But, you can see a trend. The picture I’ve created is the S&P 500 in orange and the unemployment rate (inverted) in yellow to show the correlation since 2002. You can see as the unemployment rate bottomed (since it’s inverted it topped) that the S&P 500 has peaked as well.
So, to make money, you have to address where unemployment is going, not where it’s been. If you are bullish on the economy and everything the Fed is doing, then you have to be bullish on stocks. I believe these things don’t change course over night. So, I believe we’ll see a few more months of these bad economic numbers but perhaps stabilizing meaning probably the market moves sideways as the numbers come in.
Keep in mind this is just one tiny indicator. There are numerous and none of them always work. I watch probably 100 different indicators every day. The easy money is when most of them tell the same story. Right now, there are conflicting indicators. The one I put most faith in is the supply/demand of stocks. That’s because we never know how people will react to various economic indicators. At the end of the day, the market may be way up because everybody rationalizes and says well at least we didn’t lose 100,000 jobs last month. That will show up in the demand for stocks. I want high volume intense buying to change my opinion on the markets.
