Stock Market Follies

Ok Let’s have some fun:

There are times when I want to tear my hair out. Today is one. Whatever you do: please take no notice of today’s stock market endorsement of the employment situation. These people are nuts.

This is why the whole ‘green shoots’ thing has a bad rap. The wise folks down at the stock exchange are congenitally incapable of thinking beyond the next isolated positive data point. Whatever it is.

I realize that they are naturally optimistic people. They are biased towards seeing the good news and ignoring the bad. After all they have stocks they want to sell you. And those stocks are absolutely always going to go up in price.

So why my anguish?

Well for months now we have all been focusing on the new claims for unemployment aid. This is a statistic that comes out weekly and gives us a read on the direction of unemployment. If the weekly number keeps getting bigger then unemployment is accelerating. As the weekly numbers taper off then unemployment is stabilizing. Then, hopefully, the numbers shrink quickly giving us an indication that the worst of the storm has passed.

There is another data point published at the same time: recurring or continuing claims. This shows us the number of people who are still claiming assistance beyond their first week of unemployment. They could have been unemployed for a while, but the data doesn’t break that down. Nor does it say anything about what happens to someone when they stop claiming aid. They just drop off the map. They might have found a job. Or they might have given up hope of getting one. To get insights into those issues we need to look at the employment roll data, not the claims data.

I assume you can guess where I am going with this.

Today’s data release has new claims climbing to 608,000. It is 3,000 higher than last week. That’s not good. But the four week average has fallen by 7,000. Overall that’s a mixed message. The moving average suggests the worst is over. But the one week data shows that any improvement has stalled.

So what do our intrepid green shoots hunters do? In need of good news to justify stock price increases they latch onto the recurring claims data. This is something they’ve ignored for months, if not years. Perhaps because it has been relentlessly awful for all that time. But today? Green shoots! The data shows a very dramatic drop in continuing claims. 148,00o fewer to be exact. Down to 6.68 million. That’s an improvement of 2.2% in just one week. Let me see … that means we’ll be down to zero recurring claims in less than a year. Surely this is the best green shoot yet. By the way: despite this week’s drop the four week moving average still rose slightly, by 2,250 to 6.76 million.

Yes on its face this could be good news. But we have absolutely no idea what happened to these people. That drop is only good if they went back to work. Now that would be great. But if they stopped claiming aid and still haven’t found a job that’s terrible: they will run out of money quickly. That’s not good at all.

My advice?

Ignore the fuss. Let’s wait to see how this data moves over the next few weeks. Remember it’s the trends that count, not the individual data points.

If you keep that in mind you will be way ahead of the stock market. Not that that is very difficult.