The markets have long been driven by macro-economic trends, but over the last several years one trend after another has dominated the market, from the collapse of the housing bubble, to Europe, commodities prices, QEs 1-29 (Mr. Bernanke is signaling another QE as of this writing), and more. With these trends driving the markets, investors have begun to pore over reams of economic data to find insights into Mr. Market’s next move. Multiple daily economic releases are more than most advisors can keep up with – but which indicators are worth following?
Our business at HiddenLevers involves modelling portfolio modelling and stress testing against over a hundred different economic indicators – but let me give you just one indicator to follow, whose predictive power warned against the worst of the last two market crashes: the well known non-farm payrolls report.
Payrolls and payroll growth have been watched very closely since the recession, with both the Federal Reserve and the markets hoping to see signs of recovery. Payrolls are typically viewed as a lagging indicator, but a large drop in payrolls actually preceded the worst of the market crash in 2008. This occurred after the dot-com bubble burst as well. Here’s a look at some charts showing non-farm payrolls versus the S&P 500:
Payrolls fell into negative territory early in 2008, well before the September 2008 meltdown. While payrolls didn’t predict the bursting of the Nasdaq bubble in early 2000, they did move into negative territory prior to the market lows of 2003.
In either case, reducing equity exposure based on a following of payroll trends might have reduced losses considerably. And unlike some indicators, this isn’t exactly a difficult concept to understand – when the economy moves from creating jobs to shedding them, it is likely heading into a recession, with significant impact on risk assets like equities.
HiddenLevers provides portfolio stress testing and modelling software to help advisors answer clients’ questions and fears on macro risks like inflation, sovereign debt, and more. Watch demo videos to see HiddenLevers in action here.
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