Decline in jobless claims continues to drive the market higher

Jobless claims 03.07.2013Enlarge GraphThe improvement of jobless claims through the beginning of March continues to fuel the stock market to higher levels.

As illustrated in our prior article, the decline in jobless claims from 2009 to present has helped fuel a higher stock market, and in an update to our original analysis, the near term decline in claims in January and February has continued to be met with higher stock levels.

The continued decline in weekly jobless claims is throwing gas on an already hot stock market, with the level of claims actually continuing to improve through the month of March. When we last discussed our analysis in mid January, claim levels hit 371,000 in the third week of that month, an improvement from the 375,000 level that marked the start of 2013. Now in the most recent updated weekly tally during the week ending March 1st, weekly jobless claims have hit 340,000, a 30,000 claim improvement from the start of the year.

In our long-term regression work, we have outlined that the R-squared, or the direct relationship between jobless claims and the level of the stock market, is 0.87, which means that 87% of the move in either of these variables is explained by the movement in the other variable. For example: if the stock market were to move up 5% hypothetically, over 4% of the move (87% of 5%) is likely attributed to an improvement in jobless claims. This level of interrelationship with claims and the stock market is the highest we have found in our various economic studies. Movements in gross domestic product, S&P 500 earnings, and consumer confidence all have less relevant relationships than the strong correlation between jobless claims and higher levels of the stock market.

While different economic cycles can make different variables relevant, the strong move up in stocks since 2009 has had a very strong relationship with improvement in jobless claims. With claims continuing to improve in March, this leaves good strong underpinnings for the stock market at current levels. As a result, stock based exchange traded funds (ETFs) should continue to be considered by investors, including the iShares Russell 3000 Stock Index exchange traded fund (IWV), the Vanguard Total Stock Market exchange traded fund (VTI), and the iShares Core S&P 500 exchange traded fund (IVV).