by Jared Levy on July 1, 2010
So if yesterday’s ADP report didn’t take the jam out of your doughnut, tomorrow’s job report just may. I wrote last month about the relationship between the two and also addressed the importance of job growth. The market is much like a large, very stretchy rubber band attached to the unemployment rate, as it is a lagging indicator. The market can certainly rise for a while without jobs following in lock-step. But if the market begins to move higher and the unemployment rate remains high or climbs higher, there has historically been a downward force applied to equity prices. This is partially the situation now, with other factors like Europe, China, consumer confidence, and more indicators preventing a sustainable rise in the marketplace.
The stock market is the uber leading indicator of economic growth (or the perception thereof) for many investors and economists (there are several others, such as building permits and the money supply). When the equity market begins its march higher, market participants look to coincident indicators like personal spending, consumer confidence, GDP, retail sales, etc. and earnings for confirmation, justification, and acceptance of the higher stock prices. Finally, economists and investors want to see the lagging indicators such as the unemployment rate, and consumer price index come in line with other indicators, in addition to performing based on historical observations. Generally by this time, according to Econ 101, the economy may be well on its way to recovering.
I have a great respect for economists. Like doctors, they are constantly “practicing” what they were taught. Each day, as more and more data is observed and crunched, regression models created and articles written, they learn a bit more. Past observations and methods can indeed help us to understand the future, but as we evolve globally, certain theories may not hold like they once did. Relationships between indicators may become disconnected and once-normal occurrences or deviations that we look for may become exaggerated or muted.