The WSJ had an
interesting piece yesterday. It seems
that recent employment data has violated an economic principle that is based on
more than 125-years of records. Okun’s
law (after Yale economist, Arthur Okun) relates change in employment to change in GDP. You may remember that the Obama
administration made predictions for unemployment early on in the financial
crisis that were far too optimistic.
Those predictions were based on Okun’s law that showed, based on
declines in GDP; unemployment at its lowest should only have been 8%. Instead, unemployment
fell to 10%.
Graph from Wikipedia:
http://en.wikipedia.org/wiki/Okun's_law
Now recent employment
data is flabbergasting economists again, because it does not agree with
observed GDP growth (again according to Okun’s law). Most economists (and stock market
prognosticators) start getting more optimistic when hiring exceeds 200,000 per
month, but the current pace of hiring is not supported by the low GDP growth
the U.S. is experiencing. The most likely reason seems to be that at the
beginning of the financial crisis, as the stock market was collapsing, and
predictions for gas prices were $10 per gallon, managers reduced manpower
drastically – at a pace ahead of what Okun’s Law would predict. Now that the economy is more positive,
managers are hiring at a pace far ahead of what would be predicted by GDP
growth. They over-shot firing on the way
down. Now they are overshooting hiring
on the way up. That won’t continue
though (sooner or later the employment and GDP data will be aligned), so economists
expect a slowdown in hiring based on 125-years of prior data upon which Okun’s
Law is based.
On its own, this
report may be interesting; but does it tell us anything important? I’d say, “Absolutely!” or even,
“Eureka!” Let’s consider some recent
blogs here at Navigate the Stock Market.
I reported a few days
ago that some economists were calling for a slow-down. We have John Hussman’s, PhD, warning Monday
(and for several prior weeks/months) that the economic
“canaries-in-the-coal-mines” are keeling over. I reported McDonalds’ Corp. warning of
slowdown in Europe and China’s trade deficit as possible foreshadowing economic
issues ahead on Tuesday. I reported last
week that the market, based on NTSM analysis, is getting stretched and could start
a pullback in a few-days, but most likely in a few weeks.
Now we can connect
the dots; understand why employment data is overly optimistic, especially with
regard to the leading economic indicators; and we can make a prediction regarding
the next month or two in the stock market.
So my take is this:
John Hussman’s predicted hiring slowdown is going to occur; it is likely to be the fuse that sets off the next explosive downturn in the market. Whether the market will experience a correction (10-15% decline) or another cyclical bear market (>20% decline) remains to be seen. My earlier prediction of a shallow correction and a drop to the 200-dMA will not apply if employment numbers fall significantly. Fear will drive the market below its 200-dMA.
It is interesting
that 2010 and 2011 were nearly identical years in the S&P 500 at least with
regard to corrections. In both years corrections
started in the spring and followed thru in the summer with a final higher low
in the fall. Both corrections lasted
17.6 weeks and bottomed out at the mid-point.
2012 could well follow a similar pattern.
WHAT THIS MEANS TO
INVESTORS
Since we really can’t
predict when this news will be figured out by the market, although we might
guess that it will be when the first cracks appear in the employment numbers, I
plan to stay fully invested until the NTSM analysis indicates a sell.
TODAY”S MARKET
VIX fell over 5%
while the S&P 500 was up 1.8% on good volume..
NTSM ANALYSIS
The NTSM analysis
remains HOLD.
MY INVESTED POSITION
I bought back into
the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct NTSM buy signal.
I remain 100% long in the long-term
portfolio (100% stocks in the 401k.). (See the page “How to Use the NTSM
System” – the link is on the right side of this page). Just a reminder: 100% invested in stocks is way too much for most rational folks. Don’t do it unless you have a high tolerance for risk.
