Unemployment targeting by the Fed could see equities move upwards

 
Ashraf Laidi
AS WE approach the release of the final US employment report before the presidential election, we’ll see plenty of analysis about both the recent decline in country’s unemployment rate and the health of its overall economy. Yet, if you look at more frequently-released data, like weekly unemployment insurance claims, the jobless rate has fallen by 45 per cent from a 2009 peak.

Looking back at the last two US economic downturns, the peak-to-trough decline in jobless claims was 45 per cent and 46 per cent. Notably, the April 2000 bottom in claims coincided with the April 2000 peak in US equity indices, while the January 2006 bottom in claims occurred 21 months ahead of the October 2007 peak in equity indices. But what will happen this time?

Jobless claims are currently at 369,000, down 45 per cent from their 2009 high, while both the Dow 30 and S&P500 are 5 per cent below their four-year highs reached last month. It is one thing to assume that jobless claims have reached a trough after a 45 per cent decline for the third time in 20 years. But what will be the time lag between the bottom in claims and the next peak in equities?

The answer lies in the Federal Reserve’s new policy focus of implicitly targeting a lower unemployment rate, even at the expense of a slight rebound in inflation. The Fed will maintain quantitative easing until the unemployment rate falls from its current 7.8 per cent to near 7.0 per cent. Such aggressive policy easing is likely to prove friendly for labour and equity markets. As long as weekly jobless claims do not regain the 400,000 level, and the unemployment rate maintains its downward path, markets will likely find reason to revisit their 2012 highs and beyond to reach 2007 levels.

Keep informed with the expert opinion of City Index’s chief global strategist, Ashraf Laidi: www.cityindex.co.uk/market-analysis