Equity Clock

Employment Figures – Situational Analysis

The Employment numbers are to be release this morning at 8:30 am.   The expectation is that there will be no change from previous figures and unemployment will remain at 10.0%.   Based on the market’s reaction to the jobless claim number, there remains a great deal of pessimism of the results to be garnered today.   The perception is that of doubt; doubt that the economic situation is improving; doubt that there will be no job loss following the jobless claim numbers.

How has the market reacted in the past to these numbers?

Recent History

Over the past two years, regardless of whether the the results are favorable or not, the market has gained on the day in 64% of sessions following release, producing an average gain of 0.18%.   If we open this up to the week following the release, the results aren’t as “clear-cut”.   Over the week the market has gained in 55% of sessions, but were dominated by sellers to produce an average loss of –0.59%.   If you want to cut these losses, the influences fade 4 calendar days (not trading sessions) following the release, producing average gains of 1.58%.

Analyzing further, if you narrow the results to similar market conditions on the week with a loss of between 0 and 4%, the figures are neutral, gaining on the day in 50% of sessions, producing a loss of –0.26%.   Compare this to the sumbers on the week of 75% of sessions advancing producing a gain of 1.48%.   Conversely pegging the results at similar market conditions based on prior day’s activity whereby the market has taken a significant dip, you realize that 60% of sessions have advanced on the day with an average gain of 0.64%.   The weekly numbers were neutral under this scenario.

Positive Results

If better than expected earnings are reported, the probability is that the market will have a 53% chance of gaining, with an average return of 0.15%, based on prior market reaction.   This compares to a 55% chance of gaining sessions on the week, with a loss of 0.37%, although these results can be flipped on their head by holding the market for only 4 calendar days following the release, producing an average gain of 0.87%.

Negative Results

If negative results are received, as currently seems to be the side investors are leaning towards, the numbers become more significant.   Over the last 4 years after receiving negative results, the market has gained in almost 59% of sessions on the day, but could not garner the strength to produce a gain, with an average recorded loss of 0.14%.   Open that timeframe up to a week long range following results and the market has advanced in over 59% of sessions, producing a meager gain of 0.1%, albeit improved by holding for 4 calendar days following to produce an average return of 1.53%.

Pegging these results at similar market conditions on the week, and you observe 67% of sessions advancing on the day and 75% on the week following.   Similarly, is the results are pegged to similar market condition on the day prior, the outcome for the day of release is 83% advancing with 65% advancing on the week.

Bottom Line

Investors have rallied on the negative results over recent history.   With the market already pricing in the expectation of negativity on the day prior to the news release, investors are looking forward, rather than looking back, buying into the market for future gains.

Looking at this graphically, plotting the closing prices of the S&P 500 versus Unemployment Rates, you can see that investors are buying on the bad news as of recent, sending the market higher.   This is in opposition to the inverse relationship between prices and unemployment rate that existed through the remainder of the decade.

Analysis of the past 60 years of data reveals that periods of increasing prices correspond to increasing unemployment levels.   This has resulted in a number of periods where significant gains have been made in a short period of time, as has been witnessed over the last 10 months or so.   These gains even supersede the returns garnered after a recovery has been made.   There are a number of instances where the market has failed to perform to any significant degree following increasingly better employment figures.   Based on the past 60 years, gains may not be definitively apparent until one to one and a half years following the peak of the unemployment figures with improving monthly results.   But even these gains pale in comparison to the triple digit gains witnesses over the past many months since the market low.

Therefore negative news may not necessarily be a bad thing!

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