The Pragmatic Capitalist blog has posted a chart that shows the high degree of correlation between the inverse of initial jobless claims and the S&P 500:
The correlation here is astonishing; frankly far higher then I would have expected given the recent reaction to jobs reports that the market has basically shrugged off.
I would expect this correlation to continue, as consumer confidence and jobs are the last remaining economic pedestal on which the bears can hang their hat, and if these initial jobless claims can continue their decline, we should see further upside in the market.
Disclosure: No stocks mentioned, but long the market.
With the unofficial unemployment rates approaching 20%, consumer confidence at 60% its normal level, and retail sales showing only slight percentage increases over abysmally low levels, one would be forgiven for having a low amount of confidence in consumer spending juicing the economy this holiday season. Add to this the declining levels of credit available to consumers, and a generally bad attitude towards taking on more debt as consumers retrench (especially those 25% of mortgage-holders who are underwater in their mortgage), and it looks like we are in for a rough post-thanksgiving period.
But, is it actually going to be that bad?
Last year, despite Thanksgiving weekend finding itself a few weeks after the start of the worst financial crises since the Great Depression, sales actually increased by 7.2%, with the average person spending $372.57. Over 50% of Americans were out during that weekend (source here) Since then, unemployment has become worse, but consumer confidence as measured by the UoM has increased from 57.9 to 66 (although normal levels are closer to 90).
And of course, there is always the pent-up demand. Spending this year has been unbelievably low, as exhibited by the repeated 2% declines in retail sales last year followed by scattered and inconsistent recovery. Eventually, consumers will get frustrated with the lack of new things that they have, and will crave shopping. The sale prices that will be available on Black Friday could be the trigger consumers need to dig back into their wallets.
Finally, on a personal note, how many times have we heard that some part of the economy is reaching a new paradigm (like we are hearing now). We heard it during the tech boom of the early 2000s, during the S&L boom of the 1990s, and about the economy during just about every recession. The most dangerous words I have heard when it comes to investing are: This time it is different. Consumer spending will come back, and I think it will be sooner than people think.
Disclosure: Long TGT, and am net long the market with other positions.