Blog - Investing Notes
February 2, 2007 - Update: Does Non-farm Employment News Move Stocks?
The business media and expert commentators pay monthly homage to changes in (non-farm) employment as a potential indicator of future stock market moves. Are these data in fact predictive of short-term or intermediate-term stock market behavior? Using monthly seasonally adjusted non-farm employment data from the Bureau of Labor Statistics and contemporaneous S&P 500 index data for the period 1990-2006 (204 months), we find that:
The following chart compares the behavior of total non-farm employment and the S&P 500 index over the sample period. It shows that these series generally move together, likely due to the underlying dependence of both on overall economic activity. The Pearson correlation between the two series is a strong 0.95. For major turning points, stocks appear to lead employment, but turning point sample size is so small that this appearance is statistically meaningless. Does the stock market respond reliably to incremental changes in employment?
The following scatter plot relates the coincident monthly changes in the S&P 500 index and non-farm employment over the sample period. The Pearson correlation for this data is a very weak 0.08, so there is very little relationship between the level of non-farm employment and the behavior of the stock market for the same month. Might changes in employment predict future changes in the stock market?
The final chart shows the Pearson correlations for various lead-lag scenarios involving changes in employment and changes in aggregate stock price. As noted above, the coincident correlation (0 months lead-lag) is 0.08. Offsetting the two series such that employment changes lead changes in the S&P 500 index by 1-12 months produces small positive correlations for months 1 and 2, and then a series of correlations near zero. Offsetting such that changes in the S&P 500 index lead employment changes by 1-12 months produces small positive correlations for months -1 and -2, and then a series of correlations near zero for longer lead times. These results suggest that employment and stocks may be mutually reinforcing (but only very weakly) over periods of a few months. Positive employment shocks have a slight tendency to boost stock prices, and rising stock prices may have a slight positive effect on hiring decisions. However, these effects are much too weak to serve as a trading signal.
In summary, while non-farm employment and the stock market may have very weak tendencies to move together and reinforce each other over the short and intermediate terms, other sources of stock market variability swamp their relationship.
See Blog Synthesis: The Economy and the Stock Market for other research on relationships between macroeconomic indicators and stock market behavior.
