Some economic statistics have a very high correlation with the stock market. It’s important to follow them while looking for reasons why the correlation can end. Some say when an indicator becomes followed too closely, it loses all meaning. The jobless claims have historically been correlated with stocks. The question is if this labor market, which has been relying on workers coming off the sidelines to fill jobs, will continue to correlate with equities. The jobless claims to labor force population ratio is at a record low. That hasn’t prevented the labor market from continuing to grow as the prime age labor force participation ratio still hasn’t signaled the labor force is full. So far this cycle, jobless claims have correctly predicted the market’s bull run.
Another stat that is correlated with the S&P 500 is the ISM manufacturing index. As you can see from the chart below, the ISM manufacturing index has been falling along with the year over year returns in the S&P 500.
Source: Goldman Sachs
It’s interesting because the correlation has remained tight even though the PMI has been consistent with higher rates of growth than what actually occurred. The stock market has followed the ISM PMI instead of the economy. Clearly, investors pay close attention to the index. The good news for manufacturing firms is input costs should fall because of the collapse in oil prices. However, weak global growth and tariffs will hurt manufacturers. Every ISM manufacturing report includes complaints about tariffs. The question is how much the trade war will hurt the index because we saw complaints even with amazing PMI readings.
Yield Curve Already Signaling Problems?
The most followed part of the yield curve is the 10 year yield minus the 2 year yield. It’s not the only differential to follow, but most act similarly and have similar track records. However, it doesn’t hurt to follow all parts of the curve. The chart below shows the 30 year yield minus the 10 year yield is already flashing a recession warning sign even as the difference between the 10 year yield and the 2 year yield is still positive which means the curve is normal.
