Investors who’ve written off weekly economic data as background noise may do well to start tuning in.
Movements in the U.S. stock market have been highly correlated to the unemployment data released each week by the government, according to a recent report.
Since 2000, changes in the four-week moving average of the number of people filing for new unemployment insurance benefits have been inversely related to the weekly movements of the S&P 500 index. In other words, as claims have risen, the market has fallen (and vice versa). The correlation is strong and statistically significant, according to James Paulsen, chief investment officer at Wells Capital Management and the author of the report.
For many investors, this finding is something of a coup. The weekly jobless claims report is sometimes brushed aside by market watchers and pundits in favor of the broader monthly unemployment report. However, the new study suggests investors might have more – or at least as much – success by doing the opposite, or at least paying the weekly number more attention.
Paulsen says that after years of looking at weekly jobless claims, he was surprised to find such a close correlation with the stock market. “They are almost the same with either one leading the other slightly at times,” he says, adding that “the magnitude of the movements are very similar.”
The monthly jobs report, which is released at the beginning of each month (after the month reported), is also tied to the market, says Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. However, monthly payroll data are considered a lagging – not leading – indicator.
To be sure, the value of weekly jobless claims data is hardly news to everyone. The Conference Board, an industry research and consulting group, uses the number in computing its Leading Economic Index. The group periodically looks at all 10 individual components of the index to assess whether they’re “still singing the same song,” and has made changes over the past 15 years, but “changing the status of claims hasn’t been high on the list,” says Ken Goldstein, an economist at the Conference Board.
Goldstein says if investors paid closer attention to the weekly data, they might “make better decisions,” but he warned against relying on those numbers alone.
Why are weekly jobless claims and stocks so closely related? There are few theories. Marc Pado, chief market strategist at Cantor Fitzgerald, says that jobless claims may be a leading indicator of the economy but more in sync with the market. “As the claims numbers come in each week, the outlook for the economy is immediately adjusted and the market adjusts daily, weekly, to every piece of data, so the two will never be far off from each other for more than a week or two,” he says.
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