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Fundamental Analysis Indicators and indexes help us to understand the drivers of markets (fundamental indicators). If the indicators are showing strength then we remain invested. If we see a weakening across the board of these fundamentals, only then should we think about selling.
Standard Measure of Employment
Standard Measure of Employment
Going back to the 70’s, every time full time employment has dipped there has been a recession (shown by the grey shaded area in the chart below.)
Unemployment measures and indexes come in many different forms. The main one I track is the "Initial Jobless Claims" for the US. If this was to rise above 260 (which represents 260K jobless claims) then that would a strong signal that unemployment is rising to a level where and economic downturn and recession would become much more likely ...
Jobs & Unemployment – A Recession/Bear Market Indicator
Jobs & Unemployment – A Recession/Bear Market Indicator
Below are recession indicators from the Federal Reserve in the US that incorporate measures of employment. These indicators have been very accurate in the past. (The grey areas on the graphs are recessions). The smoothed US recession probability indicator blends 4 datasets into one index: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.“
When you see US Non-farm payrolls heading down below the zero line as they did in 2008/2009 below, it points to problems in the wider economy and is bearish for stocks...
US Jobs
US Jobs
US unemployment is a top indicator for global trackers as they signal downturns in the US economy and therefore likely declines in global stock tracker funds.
I have included the "Job Losers (not of layoff)" as it seems to be more sensitive to changes in direction. (In the US, 'layoffs' include temporary layoffs as well as permanent).
The Non Farm Payroll is the most often quoted measure when it comes to the US economy. It's a monthly US employment report which materially affects the US dollar and the stock and bond market.
COOKING THE BOOKS AND/OR REDUCING WORK HOURS
One thing to keep in mind about unemployment figures is that various government and central planning authorities are increasingly being accused of "cooking the books" in order to make the figures look better than they are. We can only really go by these official figures, but all the same, it's something to bear in mind. But even if the figures aren't being cooked, employers can also simply reduce working hours making the unemployment figures look ok whilst the economy is still going into reverse. Indeed, in the graph below, you can see a strong correlation between Hours Worked (in red) and Orders (demand... in blue) going way back to the financial crisis in 2008. (The recessions are the grey shaded areas)
On the MacrMicro home page, scroll through the "Top 10 Charts of Global Economy" to the NFP (nonfarm payrolls) vs US Unemployment rate. If the blue nonfarm payroll jobs are being add around the 100K to 200K level or above, then a recession is unlikely. If this is also matched with a low unemployment rate then it makes the chances of recession even less likely.
You can see in the chart that spikes in unemployment and declines in NFP jobs correlate perfectly with recessions and therefore declines in the US stock market... and therefore declines in our global funds...
If the ISM new orders chart breaks below the recession threshold then it increases the likelihood of recession and stock market declines…
US UNEMPLOYMENT RATE RECESSION INDICATOR
The chart below shows the accuracy of the indicator that has preceded all of the major recessions going back to the late 1960s. When the unemployment rate exceeds its 24 month MA then a recession will be triggered 6 months to a year after...
The Total Non-Farm Payroll can be seen below just before the Great Financial Crisis, peaking and then trending down quite heavily. We would expect to see the same in a new crash...
The following unemployment metric (% of people in US States with rising unemployment) has only gotten this high before recessions (in grey) …. recession risk is rising…
… and as with previous recessions, these unemployment spikes all occurred off a low base of headline unemployment... (the metric above is the red line below, the headline unemployment for the US is the black line with low values heading into recessions, and the grey shaded areas are recessions.) ...
…. but as the sp500 chart below shows, unemployment started weakening in 2006 before the market topped in 2007 so we could see that happen again in 2025 with AI hype and a half decent earnings season in Q4 2024. If unemployment continues to tick up in 2025 then a blow off top in stocks is entirely possible as the equity markets will eventually have to start pricing in a recession if unemployment keeps heading north…
UK Jobs
UK Jobs
Thinking in terms of our global Index funds, we can take the UK as a barometer for Europe. The lions share of global trackers will be invested in the developed markets of the US and Europe. In terms of a downturn in Europe, we are looking for trend upwards in the unemployment rate and redundancies as a warning sign...
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