returns-beget-performance-chasing

First Time Claims

David B. Armstrong, CFA Weekly Market Commentary, Weekly Market Commentary Page 18

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A record almost as old as me – but without the bad knee.

You see what I did there with the rhyme, right?

Let’s start with a quick update and overview.

First – a quote from Barron’s over the weekend by Ben Levisohn, “Strength begat strength last week, as stocks continued to rise, even as the U.S. Dollar and bond yields headed higher.”

returns-beget-performance-chasingIt reminded me of a fairly recent quote from a former Donaldson Lufkin & Jenrette colleague turned Fed Expert and Twitter Master, Danielle DiMartino Booth (@DiMartinoBooth), “Returns beget performance chasing, a tendency as old as time.”

I wrote it on my desk blotter a few months back.

For better or for worse, the election is behind us and Donald Trump is set to take the oath of office in exactly 60 days. I’m sure by now, you the reader, have taken notice of the market’s favorable reaction to his win. But I think it is important to remember that the market will at some point return its focus to the longer-term fundamentals which include revenue, profits and forecasts for future profits as well as the overall economy, inflation and of course interest rates. (Please gently hum Darth Vader music as you re-read that last sentence.)

But let’s take a quick look at one fairly solid leading economic indicator which suggests further gains in economic activity are probably on the horizon…
Jobless claims.

“Jobless Claims” is a report put out by the Department of Labor each week. There are a number of metrics released but the one that gets a ton of attention is the first-time claims for unemployment insurance.

First time claims is exactly what it sounds like – it tallies up the number of workers who file for unemployment compensation for the first time after a layoff. When less people are making claims for unemployment compensation, it’s seen as good news and for the week ending November 12th, claims fell 19,000 to 235,000.

What’s the big deal? Well, 235k is a 43-year low!

See this chart from Charles Sherry (which shows data through 11/12/16 as claims are reported one week in arrears) and trace that red arrow back to the left until it stops…

weekly-first-time-jobless-claims

So while this shows what’s happening in the labor force (less people getting laid off), I also think it’s a decent measure of business confidence. When things are forecasted to go south in business, leaders trim expenses and reduce headcount to hunker down. While there ARE detailed surveys of business owners that measure confidence, I think the rising or falling levels of first-time claims is a non-emotional, less “touchy feely” and more transparent measure of improving or deteriorating business conditions.

Some will argue, and not incorrectly, that there will always be layoffs…even in a very strong economy. BUT, as a whole, I don’t think layoffs decline at the same time business conditions are in decline. I think it’s the opposite – layoffs decline as business conditions improve.

One really great point to note from the same chart is that jobless claims normally start to point higher before the onset of a recession. (Look at the grey shaded areas.)

And that’s not something that is happening now.

In fact, not to get to overly technical (sorry Mom), if you look at jobless claims adjusted for a rising population, claims are at a record low – see the red line in another chart from Charles below.

weekly-jobless-claims-two-views

I know the economy is not firing on all cylinders.  I’ve been writing about a tepid economy for a long time now.  But, historically, this has been a pretty reliable indicator that provides a signal of what is likely to happen to the economy over the shorter term.  While it can be volatile on a weekly basis, and the 19,000 drop last week may overstate economic strength, broadly speaking the signal is encouraging.

Please call with questions.

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About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Viewed as an industry leader in digital marketing and social media, Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary. His expertise is frequently sought after by journalists and event coordinators. Visit his full biography here.

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