Wednesday, February 23, 2011

Unemployment claims and equity prices


This is an intriguing chart, inspired by one created by macrofugue. (HT Abnormal Returns)

It's a relationship that just makes common sense (e.g., declining claims reflect a healthier economy and a healthier economy drives equity prices higher). Nevertheless, the fact that the equity market has responded quite faithfully to changes in the economic fundamentals goes a long way to refuting the bears' claim that equity prices have been driven higher by easy money, that the economy remains plagued by deep-seated problems, and it is all a house of cards ready to collapse. To me it has seemed rather obvious that the equity market rally has been driven all along by news of improvement in the economy, and declining unemployment claims is just one manifestation of that improvement.

3 comments:

Contrarian said...

in fact this is the best indicator to buy a market bottom in the middle of a recession.

Of course long term correlation is low, but in fear times, correlation is very high. A downtick in initial claims is a catalyst for a market upside movement.

gaguy1967 said...

Theyre all functions of monetary policy:

Unemployment claims
Share prices
Commodity prices.

The idea that unemployment claims are immune from easy money and thus anything that correlates with unemployment claims is also not a function of easy money is absurd. If this is true, then youve just proven that monetary policy isnt a macroeconomic tool. There should be a noble prize in economics waiting for you

Public Library said...

gaguy1967 is spot on and it absolutely means the next central bank mistake is waiting just around the corner.