Why The Market Is Wrong And The Economy Is Right
An article from BI, The Most Beautiful Correlation In Stocks And The Economy Continues To Be Perfect shows an overlay of the S&P 500, jobless claims, and the author, Joe Weisenthal claims that “…stocks reflect what's happening in the actual, real economy, as evidenced by the fact that for years, stocks have moved right in line with jobless claims.” This caught my attention and after a quick dig on Google, it turns out his analysis is DEAD WRONG and here’s why…
DENYING THE ANTECEDENT
First, the S&P data. There's no issue there but charting it against jobless claims and saying it's correlated is false and I'm only going to take issue with the latter variable for brevity's sake.
Primarily, the jobless claims are U3 data, which are workers that are actively seeking employment within the last four weeks and report doing so. Clearly, it omits anything not being reported, over four weeks, discouraged workers who gave up, and the structurally unemployed [all included in U4 data]. Stephan Bronars of Welch Consulting writing for Forbes estimates this number to be 1 to 2M people which is a lot of missing goods & services from the economy.
Further, the 7.7% unemployment rate is slightly less than it was in January of 2009, far from the 5% levels of the late 90’s and the U.S needs about 150K jobs per month just to keep pace with population growth, not economic growth.
The successive highs of the S&P 500 as a reliable economic proxy of health [jobless claims] is insuffcient, fallacious, and I argue...
there is no significant correlation between either to support his claim."
A SECOND OPINION
These were just a few off-the-cuff faults that I came up with quickly and I didn't even get into the first-reciever benefits of Federal Reserve dollar creation. But don't take my word for it, here are a couple of other reasons why Joe’s analysis is wrong…
1. Tadas Viskanta of Abnormal Returns in his article The Stock Market And Economy Are Two Very Different Animals justifies his claim from multiple sources that, "There is ample data to show that a negative relationship exists between economic growth and equity market returns.”
2. Gene Marks, owner of a tech consulting firm and writer for Inc. gives his Four Reasons To Never Trust The Stock Market.
CONCLUSION
The bottom line is, I think the S&P 500 and jobless claims are independent data sets with loose correlation at present and the recent bull market in equities isn’t translating into the real economy. This is evidenced by The World Bank's data on net U.S GDP growth of .8% from 2008 until 2012 while the biased DJIA is now trading at all-time highs.
Monkeys, do you agree or disagree with Joe's analysis and why?
You know, I'm a fan of lazy analysis, so I decided to take Joe's nice and lazy analysis and do a little lazy analysis of my own. Really, all I did was replicate his work only, instead of going back until 2007, I went back to 1984. And, if you ask me, it seems like any "correlation" he's talking about is a tremendously bad thing, indeed:
With some luck, these two lines won't be anywhere near each other. But, yeah, not exactly high end analysis on my end anyways, so who knows. Either way, I think you're right.
mike your analysis isn't really scaling the S&P accurately. Adjust the S&P for the growth of the economy and adjust the jobless claims for population growth (if you must, probably doesn't make a huge deal just looking at it though) and I think you'll have a much different graph
Oh, you're definitely right, but the changes you suggest would make my analysis no longer lazy :). Which, sadly, is the point since it appears that the author the OP is criticizing is also performing rather lazy analysis.
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