One way to look at equity prices

Here's one way of putting the equity market rally in long-term perspective. By this measure, equities on average gain almost 7% a year (plus dividends), and they have plenty of room left on the upside. The market was way too optimistic in 2000, but now appears to be right in the middle of its historic range.

Stocks gain despite equity fund outflows

For a long time, my thesis has been that the equity market was moving higher despite all the bad news and despite the very negative assumptions embraced by the capital markets. Stocks are not riding a wave of optimism; if anything, stocks are up because the future hasn't turned out to be quite as bad as the market had expected. Mutual fund flows continue to confirm this.

According to data compiled by ICI, there has been an impressive exodus of investors from domestic equity funds over the past several years, and there is no sign that this is getting any better.

Bond funds, in contrast, have been growing like Topsy ever since the crash of 2008. Investors continue to shun equity funds in favor of less risky bond funds, a clear sign that negative sentiment prevails. 

Labor market conditions continue to improve

Now that the dust of the Sandy storm has settled, we find that seasonally adjusted layoffs early this year were a bit below the average of the past year. There is no sign of any deterioration in the labor market; on the contrary, the trend over the past year has been and continues to be one of gradual improvement.

The 4-week moving average of claims last week was very close to its post-recession low. Nonseasonally adjusted claims last week were actually 14% lower than they were a year ago.

Compared to the size of the workforce, the current level of claims is historically lo, as the above chart shows.

But thanks to generous extensions of unemployment insurance and the exodus of 5 million or so from the labor force, the percent of the labor force receiving unemployment compensation remains historically high, even though it has declined significantly in the past two years.

This is one problem area of the labor market: 2 million people are still being paid unemployment insurance via the Emergency Claims provision after exhausting their regular state benefits. The other problem, of course, is that the pace of hirings has been lackluster. The fiscal cliff deal extended the emergency claims provision for another year; otherwise it would have now expired.