The unemployment numbers this morning continues to build on yesterday’s ECB announcement. The creation of 217,000 non-farm jobs for May beat the estimates of 212,000. Just as important is the revised figures for April which were increased to 282,000 and March moved to 203,000. With numbers above 200,000 for 3 months in a row, the unemployment rate itself staying at 6.3% is advising that the number of non-participating unemployed will be declining as more of the long-term unemployed start to look for jobs. The news as well that the city of Seattle raised their minimum wage this week to $15.00 an hour will likely pressure other municipalities to raise the minimum wage as well as many locations are too expensive to survive on the present minimum wage standards. Higher minimum wages means more people will likely seek employment. This will assist in meeting the Fed’s objective of reducing the non-participation rate which at one point late last year was at the highest level since the Great Depression.
Six Years
The other statistic that is interesting is that the employment has now surpassed the 2008 peak in employment. This has taken 6 years for the economy to recover all job losses from the last recession and ends further talk that the US has failed to recover from the latest recession. Definitely this has been the longest recovery aside from the Great Depression and shows just how far-reaching the devastating financial credit crisis was.
Remember Fed Tapering?
One thing investors hear little talk about now is Fed Tapering. It is still ongoing but with the non-participation rate declining and the end of the recession, we can be sure the Fed will be wrapping up the tapering. Now they will want to continue to reassure the markets and investors that they are still vigilant and still accommodative, but in essence the liquidity they have provided will be drying up.
Reasonable Multiples
Whether the markets can continue to move higher without Fed tapering will depend on corporate revenue and earnings. To continue to move higher and hold new heights, stocks must maintain reasonable price to earnings and price to cash flow multiples. That will be among the best clues for investors to follow going forward to continue to profit as stocks move higher and protect against possible downturn if multiples move too high. Despite what analysts and investors say, since I started investing in the early 1970’s, every market I have been in has fallen back when multiples became too high and revenue could no longer sustain higher multiples.
Weekly Initial Unemployment Insurance Claims
On Thursday June 5, the Weekly Initial Unemployment Insurance Claims came in at 312,000 which is well within the target I use to stay invested and keep capital at risk. The Weekly Initial Unemployment Insurance Claims are probably the second best clue as to how much capital to place at risk. In general investors want to watch for any move back toward the 343,000 level and definitely anything at or above 350,000 will mean higher volatility and choppiness in the markets. Above 360,000 and a correction is almost always in store for stocks.
Weekly claims are 10% lower compared to one year ago but what is important is that the average of new claims over the past 4 weeks has dropped by 2250 to around 310,250 which is the lowest level since June 2007. The average is important to watch as it had advised weeks ago that the US had left behind the latest recession after 6 long years. The average is also good to follow as it gives investors a solid understanding on the trends within the labor market. We can look at the weekly averages to advise us if the labor market is weakening or strengthening far better than the weekly numbers alone.
Market Timing System
As a market timing system it is simple to understand. The Weekly Initial Unemployment Insurance Claims advises us whether layoffs are falling or are on the rise. In general this tells us if the economy is producing more jobs which in turn produces more income and boosts the economic output further. Since about 75% of GDP is consumer spending, the Weekly Initial Unemployment Insurance Claims are among the first indicators to tell investors that the job market is losing jobs which gives investors time to withdraw capital and reduce exposure to corrections.
By raising capital through reducing exposure whenever the Weekly Initial Unemployment Insurance Claims advise caution, investors are able to take advantage of weakness or declines in stock valuations. Overall it is a simple system that works well at protecting an investor from committing too much capital at the wrong time and not taking enough advantage of declines.
Market Direction Outlook And Employment Numbers
An economy is only so big. The unemployment number at 6.3% will be difficult to move lower from here. What investors need to focus on is the continual employment numbers themselves and the impact on the non-participation rate. Once the unemployment rate falls below 6% we can almost always look at the economy as running at full capacity. From there it becomes a matter of watching for signs that the economic expansion is slowing. That will be the time I begin withdrawing capital for the next recession. No one can guess or estimate with any degree of certainty or accuracy when that will occur. Instead by watching the Weekly Initial Unemployment Insurance Claims we have an early warning system that while not perfect, can assist in protecting our capital and profits from loss and warn us when the economy may be starting to enter a contraction.
Market Direction Internal Links
Members Only – Profiting From Trading Market Direction
Understanding The Market Direction Portfolio – Good Place To Start
Market Direction Portfolio Articles Listing
Market Direction Portfolio Trades for 2014
Market Direction Portfolio Trades for 2013
Market Direction Portfolio Trades for 2012
Open To All Investors
Profiting From Understanding Market Direction (Articles Index)
Understanding Short-Term Signals
Market Direction Portfolio Trades (Members)