Following the leading indicators of employment have been great tools towards helping investors stay on the right side of the investment tracks, and why I check in on them from time to time. I first checked in on various employment indicators in March (see link), which argued for higher stock prices and in May ran an update (see link) that suggested higher stock prices into the fall. Those same indicators are calling for further employment gains heading into 2012 and suggests the unemployment rate could reach 6% by next year, all of which would obviously be bullish for the stock market.
Leading Employment Indicators Suggest New Highs Ahead
Shown below are two indicators, US Job Openings and the Conference Board Employment Trends Index, which both suggest payrolls continue to climb heading into the spring of 2014.
Source: Bloomberg
Another leading employment indicator is the Fed’s Senior Loan Officer Survey, which measures the percentage of banks tightening lending standards for Commercial and Industrial (C&I) loans to small firms. The survey leads employment growth by one quarter and suggests that payroll growth accelerates from present levels heading into the end of the year.
Source: Bloomberg
Another encouraging development was the surge in the National Federation of Independent Business (NFIB) Hiring Plans Index which rose to the highest level since early 2007. This is significant as the Hiring Plans Index (shown below in red inverted and advanced) leads the unemployment rate by several months and suggests we approach a 6% unemployment rate sometime in 2014.
Source: Bloomberg
Conference Employment Trends Index Suggests No Risk of Recession
Looking at the long-term history of the Conference Board’s Employment Trends Index paints a very encouraging picture. Shown below is the Employment Trends Index along with its 20-month moving average (20-Mo MA). As long as the index is above its 20-Mo MA the economy has been in expansion mode and the stock market is in a bull market. However, several months before the onset of a recession the index falls below its 20-Mo MA serving as an early warning for investors. The Employment Index also tracks the stock market closely, though with less volatility, and as long as the Employment Index is heading higher dips in the market typically serve as good buying opportunities.
Source: Bloomberg
Another support for the equity markets is the continued decline in the 4-week moving average for jobless claims. Jobless claims and the stock market have a great inverse correlation and so spotting divergences between the two can be helpful at spotting turning points in the market. Given the 4-week moving average for jobless claims hit a new cycle low (inverted in red below) last week, the risk of a major market peak for U.S. stocks seems highly unlikely.
Source: Bloomberg
Summary
Leading employment indicators have done an excellent job this year on keeping investors aligned properly with the market’s primary trend, which continues to be a bull market that began in March 2009. Currently, leading employment indicators are suggesting further payroll gains ahead and even suggest the possibility that the unemployment rate sees a 6% print sometime in 2014. Given the bullish outlook for employment, it is quite likely the S&P 500 will survive to see a five-year bull market.
