Understanding Broad Trends Driving Stock Markets

Good to be back in the saddle after of a week of traveling in Silicon Valley, Napa and San Francisco. And I thought New York real estate prices were crazy.

Whenever I am away, I like to ease back into the groove by reviewing some broad market and economic metrics. It isn’t that a lot changes in the day-to-day or even week-to-week numbers — short-term measures are terribly noisy — but rather it’s a good exercise to return to form.

Let’s jump right in:

Breadth: I have discussed the importance of the advance-decline linemany times before (see thisthis and this). The simple fact is breadth remains positive. Lowry Research Corp., a technical market-research service, observed that several of its advance-decline indicators “are all confirming the April market highs.”

From my perspective, I find it extremely helpful to be able to put this into context for those who have a low tolerance for volatility. It also is nice to know where we might be from a cyclical perspective. If you are a long-term asset allocator, willing to ride the ups and downs of volatility, this probably doesn’t mean very much to you. But if you are a trader, this may well mean that there more gains to be had.

Employment: Regular readers know of my disdain for the obsession with this number. It is very noisy and subject to significant revisions. The broad trend is what matters much more than any single month’s data.

Was the weak showing for March a one-off, or was it the beginning of a new, deteriorating trend? We won’t be certain for a while, but Friday’s numbers didn’t suggest a weakening employment pattern. Unemployment fell 0.1 percent to 5.4 percent and wages rose slightly (0.1 percent). The data also show that long-term unemployment — those people who are unemployed for more than 27 weeks — continues to head lower. It is now 29 percent of total unemployment, down from 45.5 percent in April 2010. This, along with little increase in wages, has been the most stubborn negative about nonfarm payrolls.

 
Continues here What Drives the Stock Market

 

 

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  1. rd commented on May 11

    I would toss demographics into the mix of drivers. The size of population cohorts goes in distinct cycles that help drive the economy and stock markets. Ironically, the size of the cohorts is itself partially driven by the economy (1930s depression and WW II dramatically reduced birth rate – WW II also ensured that many young men born between 1910 and 1930 didn’t make it to middle age which impacted the economy into the 1980s but also provided the opening for women and minorities to enter the middle and upper levels of the work force after the passage of the Civil Rights Act).

    For example, right now the over 60 cohort is large and its labor force participation rate is rising, which means there is a glut of labor in the US, especially for service jobs. The rise in the participation of this cohort parallels the flattening and reduction in the real median household income over the past several decades. However, there is a distinct demographic divot coming up as the 1964 to 1980 births were significantly lower compared to the 20 years before and after. I expect that we will be reading stories about rising household incomes and declining corporate profit margins 5-10 years from now as the boomers age out of the work force and the smaller Generation X occupies the 40 to 60 year old cohort.http://www.advisorperspectives.com/dshort/commentaries/Aging-Labor-Force.php

    The 1930 – 1946 birth depression lines up well with the 1970s-80s low P/E period for stocks as the period when that cohort reached its peak productivity 40-49 years of age. l think looking forward at the stock market for the next couple of decades, a key question is whether or not that will repeat as the 1970s birth divot works its way though after the Boomer bulge has retired. I know in my work place most of the workers are currently over 50 or under 35. Only a few are in the 35-50 cohort.

    This is useless as a trade timing mechanism, but is useful for setting decade and multi-decade return expectations, similar to Shiller’s CAPE and other similar valuation tools. If we exceed the returns that some of these measurements would indicate, then life would be really good. If not, then pounding money into savings will hopefully have been sufficient.

    • supercorm commented on May 11

      Indeed .. not to mention people in the 55-70 age bracket spend 30-40% less than the 30-55 bracket. Not good for your sales Outlook …

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