Thursday, January 24, 2013

Economic fundamentals drive equities higher

High-frequency data continue to reflect slowly-improving economic fundamentals. But since interest rates are still priced to a recession, equity prices are likely to continue to rise as long as there is no sign of a new economic downturn.



The first two charts show seasonally adjusted unemployment claims on a weekly and 4-week moving average basis. However you look at the data, claims have reached a new low for the current business cycle. This is consistent with the pattern of every business cycle. This recovery has been miserably slow, but it is ongoing.


I first showed this chart is a post back in October 2011 (and many times since then). At the time, the market was beset by fears of a Eurozone crisis, and my point was that those fears were overblown because the fundamentals of the U.S. economy—as reflected in the ongoing decline in unemployment claims—were still improving. That's still the case today. As the above chart shows, equity prices have been tracking the improvement in claims throughout this recovery. Equities offer returns that are too attractive to resist as long as the economy fails to deteriorate, especially when compared to the extremely low yields on cash and Treasuries.

8 comments:

Gloeschi said...

I believe there is a typo in the first sentence. It should read:

"High frequency TRADING continues to SUGGEST slowly-improving economic fundamentals".

Oh, and by the way, "interest rates" are not pricing in anything; they are set by an institution having a monopoly over them. It's called the Fed. The Fed owns up to 70% of longer-dated Treasury bonds outstanding.

I wonder if you would say the same thing about your local cable company, which controls 70% of the market. If your monthly bill is high, does that mean the TV program must be great since consumers value it so much?

Joseph Constable said...

In trying to get to the bottom of the reason equities are not as popular as it seems they should be I looked at the Fed Funds Flow report Z.1 Table D3 where since Aug’08 to Sep’12 businesses increased their debt by $635.9 billion, households decreased their debt by $880.7 billion, and state and local government increased their debt by $146.5 billion, for a net deleveraging in the credit market of $98.3 billion.

My point is that with no or slow money supply increases from credit, confidence and optimism may be prevented.

Joseph Constable said...

In trying to get to the bottom of the reason equities are not as popular as it seems they should be I looked at the Fed Funds Flow report Z.1 Table D3 where since Aug’08 to Sep’12 businesses increased their debt by $635.9 billion, households decreased their debt by $880.7 billion, and state and local government increased their debt by $146.5 billion, for a net deleveraging in the credit market of $98.3 billion.

My point is that with no or slow money supply increases from credit, confidence and optimism may be prevented.

Joseph Constable said...

How in the world for just the third week of January where raw unemployment claims are higher by 20,000 compared to the same week last year, they come up with a 330k claims when last year was 372k. These guys are magic.

No doubt employment is improving. That is not arguable. But they shouldn’t be manipulating the public even if it is “for the greater good”.

Unknown said...

"How in the world for just the third week of January where raw unemployment claims are higher by 20,000 compared to the same week last year, they come up with a 330k claims when last year was 372k. These guys are magic."

Last year, the week ending 1/21 - which is the comparable week - contained MLK Day. This year it arrived *this* week, which won't be reflected until *next week's* initial claims release. So basically, there was 1 less business day in the comparable week last year than there was this year. You'll get the reverse happening in next Thursday's data.

Benjamin said...

The Fed is sustained its QE program, so maybe there is hope for the US economy and equities...the fear is that the Fed---like the Bank of Japan---will stop QE too soon.

The BoJ ran a QE program 2001-6 that John Taylor gushed about

Then, they stopped. To this day, Japan is waging a losing fight against deflation. The latest report is more deflation---and their equities and proper markets have never recovered from 1990s dumps.

Can the Fed learn from Japan?

Hard to say---only after four years of dithering, did the Fed move to open-ended QE, which now appears to be working, judging from Scott Grannis' write up of today.

ฺBut remember, modern day central bankers never say, "We must show steely resolve in the fight for growth, even if it means facing moderate inflation."

Central bankers are fixated on (chimerical) price stability, even though no one anymore knows if a CPI properly measures prices in a world of rapidly evolving differentiated products and services and retail platforms (think Craigslist).


Benjamin said...

BTW, six of the last eight monthly CPI index readings have been down.

The index is lower now than eight months ago.

Maybe bondholders see deflation setting in, ala Japan.

Public Library said...

Ben,

The CPI tells us nothing. Check the price at the pump, commodity prices, the price of real estate in NYC, London, DC, SoCal, Hong Kong, tradable wine, classic automobiles, food etc.

By the time the CPI and Fed catch-up, its already too late. This pattern is consistent over time too.

Japan is losing the relative fiat game, not for a lack of effort spending and printing. However, that road leads to the bottom anyway which is where most of the printing countries are headed.