US Jobless Claims vs Equities

As we approach the release of the final US employment report before the Presidential Elections, much analysis will be made about the recent decline in the unemployment rate and the overall economy. Yet, looking at a more frequently released job figure such as weekly claims of unemployment insurance, it has fallen by 45% from their 2009 peak.

Looking back at the last two US economic downturns, the peak-to-trough decline in US jobless claims was 45% to 46%. Notably, the April 2000 bottom in jobless claims coincided with the April 2000 peak in US equity indices, while the January 2006 bottom in claims occurred 21 months ahead of the October 2007 peak in equity indices.

So what will it be this time?

Jobless claims are currently at 369,000, down 45% from their 2009 high, while both the Dow-30 and S&P500 are 5% below their four-year highs reached last month. It is one thing to assume that jobless claims have reached a trough after a 45% decline for the third time in 20 years. But what would be the time lag between the bottom in claims and the next peak in equities?

The answer lies in the Federal Reserve’s new policy focus of implicitly targeting a lower unemployment rate–even at the expense of a slight rebound in inflation. The Fed shall maintain quantitative easing until the unemployment rate falls from its current 7.8% to near 7.0%. Such aggressive policy easing is likely to prove friendly for labour and equity markets. As long as weekly jobless claims do not regain the 400,000 level and the unemployment rate maintains its downward path, markets will likely find reason to revisit their 2012 highs and beyond… to reach 2007 levels.