Let’s have a go at some historical charts that might be influencing the FOMC today.
Everyone is pretty much expecting a "No change in Interest Rates (let’s parse the statement for minor grammatical changes)" type of day — to be followed by a series of market moves up and down commencing at 2:15pm. More than a minor deviation from that scenario would be a major surprise.
As we await the inevitable, have a look at these rather informative charts, via economagic:
Payroll Employment 1960-2006
Black line is total NFP; Red lines are year over year change
Note the cyclical tendencies of the Business Cycle: During expansions, hiring ramps up rapidly, then plateaus. It begins to fall soon thereafter.
Advocates of the "Soft Landing" should note that in 1966 and 1995, after strong moves up, there was a peak, a move down (year-over-year changes), which quickly stopped and reversed back up.
Also worth noting: in non soft landing years –1969, ’73, ’79, ’89, ’99 — there was a major plateau in hiring on a year over year basis, which then led to a long slide downwards in hiring. This was followed by a recession. (Need I point out the plateau in 2006?)
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Here’s a chart going back to 1960 that covers the Fed Funds rate as well as Prime rate (defined as the interest rate charged by banks to their most creditworthy customers). What is particularly noteworthy is that the relative interest rate could be high or low and lead to a subsequent recession. (Changes in Rates relative to Real after inflation rates matter more).
If I get some time this week, I’ll do the same thing for wages (which are a bit more challenging to graph).
Charts via Economagic
” During expansions, hiring ramps up rapidly, then plateaus. It begins to fall soon thereafter.”
Yes, in fact some of the best market returns occur simultaniously with slowdowns.
Barry…On a side note, you obviously have much respect for Rich Bernstein. Today he revised his S&P ’07 growth rate up to 12% from 8%. What are your thoughts on this outlook?
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BR : Please provide some eivdence for the statement:
“best market returns occur simultaniously with slowdowns”
I would have titled the article:
“I’m just waiting on the Fed.”
a la The Rolling Stones…
BBY taking it on the chin this morning. I thought electronics are the hot ticket for Xmas this year
Mr Bernstein from Merril Lynch is not the only one in the strategists club to ramp up his forecast, please see hereunder:
. 7 (Bloomberg) — The Standard & Poor’s 500 Index will climb to a record 1550 in 2007 as business investment and exports mitigate a slowdown in consumer spending, according to Goldman Sachs Group Inc.’s Abby Joseph Cohen.
Edward Keon of Prudential Equity Group LLC recommends a 90 percent allocation for stocks, while Strategas Research Partners LLC’s Jason Trennert has a 75 percent weighting.
Keon has the highest 2007 estimate for the S&P 500 among strategists who have already released their forecasts, at 1600. Trennert and Francois Trahan of Bear Stearns & Co. match Cohen with estimates of 1550.
Trahan, the top-ranked strategist in this year’s Institutional Investor poll, expects an expansion in price-to- -earnings ratios to spur 2007’s rally.
As a multi conclusion:
If there is a mistake in the forecast it will be a collective mistake (which is a rare case)
Merril Lynch survey has demonstrated in several occasion that experts forecast were denied by the market trend, may be Mr Berstein knows it.
The situation is important enough to see a collective positive consensus.
While we’re all waiting on the Fed today, could somebody please explain the mechanism of how the unwinding of puts and calls tends to cause what’s known as ‘option strike pinning.’
Please make the assumption for providing your answer that I’m a reasonably intelligent H.S. 10th grader.
Many thanks, Eclectic
Where did you find Rich Bernstein’s analysis?
Thanks –
Waiting for The Fed
The Big Picture Blog offers a few charts ahead of todays Fed Meeting, and a take on expectations:
Everyone is pretty much expecting a No change in Interest Rates (lets parse the statement for minor grammatical changes) type …
You have to have money with Merrill to get Bernstein’s commentary. I suppose what the gentleman is saying about the best returns coincident with a slowdown is that wave 5 is the mania wave. So, into 2000, while the economy was surely slowing, the market leaders blew higher. Ditto with metals, transports, brokers, etc this time. Sort of coincident with a slow down…..I guess.
“Need I point out the plateau in 2006?”
Yeah, you do, because it’s significantly lower than past plateaus, especially if scaled by the size of the urban-adult population. Could this be because firms did not over-hire this time around and thus will have to let fewer workers go during a slowdown? The chart also says “no dive in NFP, no recession” so I’ll stay long until I see the cliff.
Barry,
Your chart above shows the economy/employment slowing down in 1995, as the market had a huge gain. Other mid cycle slowdowns have coincide with nice equity returns… much like the slowdowns experienced in 1985, 1986, (and 1995). Each of these slowdowns was preceded by Fed rate hikes and in each case the market was a leading indicator…went higher.
you might want to graph YOY percentage change for MZM and the S&P. I was looking at that graph going back to the 60’s last weekend. It’s too bad you can’t get a lead/lag skew going on the charts at economagic(or can you?). What I saw from the data on that correlation has me rethinking the MZM/S&P correlation but I am only an amateur in that arena. I’d love to get the opinion of more savvy chart technicians on the results. Hint: the S&P appears to lead the MZM just slightly which seems very counterintuitive
“Yeah, you do, because it’s significantly lower than past plateaus, especially if scaled by the size of the urban-adult population.”
Huh? With unemployment at 4.5%, wouldn’t you say that the plateau may have maxed out? How much higher would you expect the plateau to go?
“The chart also says “no dive in NFP, no recession” so I’ll stay long until I see the cliff.”
All well and good, but you may be looking up.
Re: Wage, prime rate, etc. Charts
I belive Joseph Ellis keeps all of his “Ahead of the Curve” charts up to date on his website:
http://www.aheadofthecurve-thebook.com/charts.html
For those who haven’t read it, he builds an argument for using PCE as a key indicator.
“Huh? With unemployment at 4.5%, wouldn’t you say that the plateau may have maxed out? How much higher would you expect the plateau to go?”
Not higher…longer. We will likely persist at this level for the foreseeable future. In the meantime, thanks for contributing to the Wall of Worry!
“Need I point out the plateau in 2006?”
Man is a monkey capable of pattern recognition.
:)