Jobless Claims & Market History
August 4, 2015
In a recent post outlining why he is bullish on the U.S. economy, Cullen Roche highlighted the fact that the 4-week moving average of Jobless Claims continues to decline YOY as a key reason for his optimism. Using the following chart, Roche notes that “we have never had a recession in the USA without jobless claims spiking 20% year over year”:
As Jobless Claims relate to equity markets, one would expect this 20% threshold to be breached well past a market peak, as the market tends to lead the economy. Since the data began in 1968, there have only been 8 instances of Jobless Claims breaking the 20% threshold, so any market analysis around these data points is relatively straight forward…
Using the S&P 500 market level at the time the 20% threshold was breached (as close to the date as possible), I looked at the price delta: 1) from the trailing 300-day high; and 2) to the forward 300-day low.
- From Trailing 300-Day High
- Average: -12%
- Median: -14%
- High: -18% (1974; followed by -37% to the low)
- Low: -5% (1979; followed by -4% to the low)
- To Forward 300-Day Low
- Average: -23%
- Median: -20%
- High: -49% (2008; preceded by -16% from the high)
- Low: -4% (1979; preceded by -5% from the high)
While certainly not something to look forward to, suffering thru at worst an 18% decline from the peak before fully hedging against an oncoming recession is not a terrible price to pay for sticking with a bull market trend firmly in place. My rough guess is that one would (more than?) make up for the 18% post-peak decline by not getting out too early.
The Jobless Claims “20% Spike” indicator is merely one leg of the market analysis stool. When combined with highly favorable corporate credit conditions, and a favorable market technical picture, the outlook for this bull market is quite favorable at present.