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While watching the morning spin of a national financial news show can result in an alphabet soup of what drives markets and the $16 trillion U.S. economy, a highly dependable driver of the S&P 500 stock index has been the level of weekly initial U.S. jobless claims. Released by the Department of Labor every Thursday at 8:30 am EDT, initial jobless claims relay the number of Americans that have filed for new unemployment benefits the prior week. A high level of initial jobless claims means more people are out of work and hence need weekly unemployment benefits and that the unemployment rate is increasing. A lower level of claims means Americans are getting back to work and are generating income on their own and that the unemployment rate is decreasing.
While the relevance of economic variables that influence the stock market can change quite quickly, the relationship of unemployment claims to the trajectory of the S&P 500 has been very strong this cycle. As highlighted by the ovals in the chart above, the precipitous decline in the S&P 500 late in 2008 and early 2009 marked by the Financial Crisis, was exacerbated by a continual rise in unemployment claims. During the first quarter of 2008, initial unemployment claims averaged 349,000 per week, a level not too dissimilar from the most current levels to start 2013. However with the onset of the Financial Crisis, by the fourth quarter of ’08, weekly unemployment claims were averaging 520,000. During this time the S&P 500 dove from a level of 1,315 on March 28th, 2008 to 873 during the last week of the year. That was a decline of over 33% for U.S. stocks and conversely a rise of 49% for jobless claims. Simply put, the market decline was tracking the rise of initial jobless claims.
It is interesting to notice in the chart as well that initial jobless claims reached their peak, and the S&P 500 reached its bottom at almost the same time (see the second set of ovals above). The S&P 500 reached its lowest level on March 6th, 2009 at 683, just 3 weeks before the peak or highest level of initial jobless claims on March 27th, 2009 at 667,000. In quantifying this relationship between claims and the S&P 500, we have conducted a regression of the two variables on a weekly basis from 2007 through the current week of 2013. The R-squared between the two data sets is 0.87 which means 87% of the time an improving jobless claim report (or a decline in claims) results in a rising S&P 500. Any R-squared over 0.70 in quant is deemed as statistically significant.
Thus while many investors tune in everyday to the financial media to track various macro economic data points, we point out that every Thursday morning the reporting of initial jobless claims has been an important driver of the stock market this cycle. State Street’s S&P 500 ETF (SPY) tracks the performance of the S&P 500 and other broader stock market proxies that would reflect the outcome of jobless claims include the Vanguard Total Stock Market ETF (VTI) and the iShares Russell 3000 Index (IWV).
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