Merryn's Blog

Why US job claims matter to UK stock prices

What caused last week’s FTSE panic? Greece took most of the blame, but you might be better watching the state of the US jobs market. It’s actually a pretty handy guide to the direction of the UK stock market. David Stevenson explains.

What caused last week's FTSE panic?

American dole queues could be partly to blame. Initial jobless claims for the last week in January were expected to fall. But they climbed by 8,000 to 480,000, suggesting the US economy is doing worse than was thought. In turn, that's a bad sign for company profits and suggests the rest of the world will soon be suffering, too.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Then, rather than increase by 15,000 as forecast, US 'non-farm' payrolls shrank by 20,000 last month, i.e. there were fewer people employed. But the jobless rate still fell to 9.7% in January from 10% in December. In addition, all the earlier numbers have been revised.

Confused? I was. So was the stock market.

Advertisement
Advertisement - Article continues below

With so much contrasting data, trying to analyse short-term jobless trends is a bit of a nightmare. And getting fixated on specific numbers is generally a waste of time.

But when the dust has settled, it's still worth watching the US job scene because it's actually a handy stock market guide.

This Bloomberg chart makes the point.

DS-blog

First the simple bit the blue line is the FTSE 100 index. Heading back down after the big rally from the March 2009 lows.

The red line is more complex, so please bear with me. It's the four-week moving average, i.e. it's a 'smoothed' measure, stripping out weekly swings, of US initial jobless claims. That's the number of Americans who've filed for unemployment for the first time.

And on the chart, this has been inverted. In other words, the more claims there are, the lower the red line. For example, in the first quarter of last year the level topped 650,000. Then it fell back to 450,000, and now it's rising again.

Advertisement
Advertisement - Article continues below

When the government's 'stimulus' measures run out, the prospects for US economic growth will look distinctly dodgy. So America's jobless claims could rise much more.

What does this mean?

First, that long-term trends still make a lot of sense. More jobs = more prosperity = higher share prices. And vice versa.

And second, that it's worth keeping a very close eye on that red line. If those US claims start climbing big-style, just watch the FTSE fall.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019

Most Popular

Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/economy/600802/money-minute-wednesday-12-february-grim-times-for-european-industry
Economy

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019