Sent: 20-02-2013 15:18:01
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Jobless Data Point the Way for US Market
US jobless claims data could offer a guide to the trajectory of US equity markets battling to escape the gravitational pull of their historical peaks.
The S&P 500 share price index has been pushing against historical high points at which it had peaked previously in August 2000 and October 2007. These levels, at approximately 1524, are now acting as a technical barrier to any further ascent in the market.
A fundamental barrier is also evident, namely, a slowdown in company earnings growth. While companies have been able to sustain earnings growth through cost cutting, further upside is likely to depend more heavily on higher revenues. Stronger consumer spending and more robust personal financial circumstances will be needed for this to happen.
There was good news on the US jobs front in the past week as the weekly jobless claims data surprised the market on the downside pushing below 350,000 to take the reported numbers back to where they had been in early 2008.
Although far better than numbers around 650,000 recorded during the worst of the recession in 2009, the weekly jobless claims are still some way short of where they are needed before sustainably better economic conditions can be assumed. The four week average level of claims had been as low as 273,000 in April 2000 and 291,000 in February 2006, for example.
Meanwhile, a leaked email from a Wal-Mart executive on Friday seemed to raise doubts about the state of household budgets and the potential contribution of consumer spending to economic growth.
While the Wal-Mart email should normally be considered noise rather than news, its dire warning about a February sales plunge at the largest U.S. retailer is consistent with an underlying anxiety among economists about the impact of the US payroll tax hike which came into effect in January.
The tax change arose from the expiry of one of the tax concessions introduced in 2008 to offset the impact of the financial crisis. Many workers would have only realised the extent of their income loss in late January when the higher tax hit payrolls for the first time.
Some policymakers had been hoping that improvements in the housing market and more buoyant equity markets might have been rejuvenating animal spirits sufficiently to take consumers' minds off the tax increase. The Wal-Mart experience, if representative, would suggest consumers do not have that much spending flexibility at this point in the cycle.
In truth, any conclusions about a connection between the tax increase and a fall in consumer spending are supposition based on coincidence, at this stage.
At a minimum, however, the Wal-Mart report is a warning to legislators about the potential impact of their spending and tax decisions as they decide whether to permit automatic spending cuts due to come into effect on 1 March or seek higher taxes to prevent the spending cuts from taking effect.
If fiscal decisions are going to be translated so swiftly into broader rates of economic activity, investors will also become increasingly nervous about the outlook until these matters are resolved.
Aside from the occasionally leaked Wal-Mart email, the jobless claims data are among the most timely indicators of the condition of household finances and, consequently, the prospects for corporate revenue growth.
Consequently, there has been a strong correlation between movements in weekly jobless claims and the S&P 500.
Each of the two most recent high points for the S&P 500, in 2000 and 2007, was preceded by a deterioration in weekly jobless claims numbers.
The reduction in average jobless claims from just under 660,000 in March and April 2009 to last week's 350,000 level coincided with a low point for the S&P 500 in April 2009 and a subsequent rise of 90%.
Continuing improvements in the level of jobless claims would be an important signal that the market could go higher.
Obviously, sustained earnings improvement is needed but there are sound reasons to use the jobless claims data as a short term proxy for what might be happening over a longer spread of time.
Improved demand for labour means businesses are in better financial shape. Labour market improvements also suggest stronger underlying personal income growth or, at least, greater confidence among employees about the security of their jobs. At the margin, that might make them more willing to spend.
A rising equity market in response to these signs creates some self reinforcing momentum. Stronger market conditions create a positive wealth effect for households. This, too, helps to raise confidence and reinforce the willingness to spend.
For the last month, the improvement in the jobless claims data seemed to have been losing some momentum just as the market also seemed to have run a little too far ahead of the current trajectory of earnings. The two were ominously in synch.
The latest jobs number offers a welcome glimpse of additional strength but a single number will not generate enough velocity to escape the gravitational pull of the previous share price peaks. Continued falls in jobless claims in the coming weeks will be needed to confirm the capacity of companies to generate stronger revenue growth.
As we search for indicators that the S&P 500 could break its historical shackles, the jobless claims data might be as good a guidepost as we can find pending another round of earnings releases.
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