Employment and Stocks Over the Intermediate Term
Posted in Economic Indicators
July 6, 2009
U.S. job gains or losses are a prominent element of the monthly investment-related news cycle, with the the business media and expert commentators generally interpreting changes in employment as an indicator of future economic and stock market health. Are these data in fact predictive of U.S. stock market behavior in subsequent months? Using monthly seasonally adjusted non-farm employment data from the Bureau of Labor Statistics and contemporaneous S&P 500 Index data for the period January 1950 through June 2009 (714 months), we find that:
The following chart compares the behavior of seasonally adjusted non-farm employment and the S&P 500 Index over the entire sample period. Visual inspection suggests the possibility of positive relationship between the two series, but the much higher volatility of stocks makes comparison difficult.
For a closer look, we compare the monthly changes in employment to monthly stock returns.
The following scatter plot relates next-month return for the S&P 500 Index to the monthly change in non-farm employment (announced at the beginning of the next month) over the entire sample period. The Pearson correlation for the two series is 0.00 and the R-squared statistic 0.00, indicating no relationship between them.
For a recent subperiod (234 months since the beginning of 1990), the Pearson correlation is +0.14 and the R-squared statistics 0.02, indicating that the monthly fluctuations in employment explain 2% of the variation in stock returns the following month since 1990.
Might the relationship between monthly change in employment and stock returns be stronger over some other forecast interval?
The next chart plots Pearson correlations for various lead-lag scenarios for monthly employment changes and monthly S&P 500 Index returns since 1950 and since 1990, ranging from stock returns leading employment changes by 12 months (-12) to employment changes leading stock returns by 12 months (12).
Data for the entire sample period suggest that a past stock market advance (decline) offers slight indication that employment will be relatively strong (weak) over subsequent months. In contrast, relatively strong or weak employment trends say practically nothing about future stock returns, with a very slight hint of a contrarian indication.
Data for the recent subperiod confirm that a past stock market advance (decline) offers indication that employment will be relatively strong (weak) over subsequent months. Unlike the longer term results, relatively strong (weak) employment trends are slightly positive (negative) for future stock returns. Results for this recent subperiod, with all positive correlations, suggests that the duration of any major trends in employment and stock returns during this time may exceed the lead-lag intervals considered.
The differences in results between the entire sample period and the recent subperiod could be due to some structural change in the economy or to some fairly long-term random fluctuation in the employment-stocks relationship.
In general, the predictive power of monthly employment changes appears too weak to be useful as an intermediate-term stock market timing signal. Could aggregating changes in employment over some interval longer than a month enhance predictive power?
The next scatter plot relates next-quarter return for the S&P 500 Index to the quarterly change in non-farm employment over the entire sample period. The Pearson correlation for the two series is -0.10 and the R-squared statistic 0.01, indicating a very slight negative relationship between them. In other words, there is a very slight indication that relatively strong (weak) employment forecasts a relatively weak (strong) stock market.
For the recent subperiod since 1990, however, the correlation is +0.16 and the R-squared statistic 0.02. The inconsistency in results undermines confidence in a true relationship.
In summary, evidence from simple tests offers little evidence to support a belief that monthly or quarterly changes in U.S. employment offer a useful indication of future U.S. stock market returns.
This analysis does not rule out the possibility that surprises in employment changes, relative to some measurable expectation, usefully forecast stock returns.
