How is this better than the current jobs index? Will P123 be able to download a point-in-time series for it? (all of the indexes used to calculate it were available from 1990 or earlier)
It seems to me that adding it to a Market timing series calculation would help.
Denny - you provided the same link twice. In any case this seems to be another meaningless index, burying the real numbers, just like the unemployment statistics which are meaningless.
Thanks, I fixed the redundant link. And yes, there is a lot of flakiness in the numbers, but with the labor force participation rate included in the calculation, is there any use for it in market timing?
Denny - the labor force participation rate is buried so far down that it might as well not be there. And don’t forget that this index is comprised of many government indices that are revised on a regular basis. So I don’t think you could count on it to be accurate at any given time. It looks more like an instrument for government propaganda.
The most important thing for valuation is cash flows. Therefore, the only thing about the employment rate that really matters to me is corporate profits, because:
[Corporate cash flow to equity] = [corporate profits] * [net payout yield], and
[Corporate profits] = [employment rate] * [sales per employee] * [corporate net sales margin]
This will also get you there:
[GDP] = [employment rate] * [productivity per employee]
[Corporate profits] = [GDP] * [corporate net GDP margin]
So, no, I don’t think the new metric really should matter to equity valuation
I’m not sure I will use it but it is very easy to make the argument that this could be a good indicator. After all the the fed must think it is important otherwise they would not have created it. Does anyone question whether Janet Yelllen thinks employment is important? If Janet Yellen thinks it is important then the information might be used to to determine interest rates. If this indicator is a predictor of near term interest rate changes, it will be a predictor of near term market changes. It does not have to have any real economic importance.
Jim - what is more important to the Fed is the appearance of an improving economy, especially before the mid-term elections. Once over, then it is simply a matter of revising the statistics after the fact, as the government so often does. Back in 2008 the Fed failed to recognize the recession until at least a year after most CEOs were already saying we were in one. Why is that? Today we have zero or negative interest rates in various European countries, and Europe is taking over the stimulus activities. Oil, gas, and other commodities are trending down, perhaps a sign of deflation. The US labor force participation rate is at a 36 year low. But yeah… interest rates are going up
Yep. In support of what you are saying, I think: just before the fed is about to increase interest rates, they make public a new indicator called “The Change in Market Conditions Index” that supports this move.
When all else has failed manipulating statistics is a government’s next natural move.
It applies to everything: economics, healthcare, crime rate, poverty etc…
The imagination of politicians when it comes to fooling people is impressive.
Incentives matter. The politicians want to show good numbers. While the Fed is officially independent, the president chooses the head of the Fed. Therefore the Fed wants to make the president look good. The Fed has a tremendous amount of power to influence elections. “In the 28 presidential elections since 1900 prior to that 2012 one, the stock markets rallied in September and October 16 times. The incumbent party won 15 of those elections! And during the 12 times when the stock markets fell in September and October, the incumbent party lost 10.” See here .
It’s the same thing with corporations. CEOs want to keep their job. Stockholders have an influence on the CEOs job. Stockholders want inflated numbers. Why? Because stockholders have an average turnover rate of <3 years and are looking to sell soon for a quick buck. Therefore the CEOs want to please stockholders by releasing pumped up numbers so that their stockholders will be able to get a high price for selling.
The difference between the CEOs and the Fed is that if CEOs cheat then the government could come after them. Hopefully the Judicial branch has no vested interest in the matter so they can be impartial (which can often be true to some extent). The CEOs also have to get the auditors to sign off on it (which is not always so difficult since the CEO has a huge influence in hiring the auditor). As long as they just bend the rules a little and don’t step over the line then they are fine. However when the government cheats there is no one to answer to other than the voters.
There is also another reason. The Fed and president have literally given away trillions of dollars so they need to show that this great giveaway has had meaningful results. Otherwise the fed has failed a second time in what is their sole reason for existence. There are lots of people who would like to see the federal reserve eliminated.
OK, I take from the responses to my original question, that the government lies to us (I didn’t know that ), and therefor the new job market index is useless.
However, “if” a point in time series could be found or created, could it be helpful in market timing. There is a LOT of info tied up into that indicator. To me, it looks like a it is just another ranking system for the job market, not unlike Marco’s new Macro Charts are for the broader market. I was thinking about how it could be used as another series included within a broader Marco Charts timing system.
I think it would be a very long time before this is likely to be useful. It’s not gonna have a historical index, PIT data series that is accurate, is it? Even if it does…I have not found things like unemployment to be more than slightly helpful in building market timers.
I still believe that a) price series data, B) cumulative market breadth indicators, C) aggregate earnings and relative market valuations (to current options…and, to a lesser degree historicals), d) volatility, e) investor sentiment (inverse) and possibly f) volume data…are the best indicators for building timing signals. They should contain the most aggregate information.
Maybe market ‘fundamentals’ can be layered on for ‘confirming’ or ‘disconfirming’ signals. However, likely at very small weights. If unemployment is high and rising…but the Fed is stepping in and making credit free…and driving interest rates on equities and ‘risk assets’ to zero…and, as a result…margin borrowing and risky asset investing is exploding…it’s probably more important to just ‘read the tape’ then to look at more detailed and nuanced fundamentals. All of these data points should be ‘in there.’
Or…if unemployment’s falling, but the US has just entered two major land wars…again…it’s a minor factor in the predicting the current state of the ‘market’ in many cases (I am guessing here, but have studied Unemployment some).
Even if 20 years of data exists on this index…and it’s accurate…there aren’t that many ‘recessions’ and it’s hard to make much of the data. The more complex the fundamentals plugged in, the less we really know about what’s going on with the overall equation.
So…I’d love to play with it. But…not sure it’s gonna be that useful…or incrementally that much more useful than Unemployment alone. I bet the core ‘labor market’ factor will end loading about evenly on either of these if they are inserted into a prediction equation.
), and therefor the new job market index is useless.