S&P 500 – SPY – Jobs. Trends. Insight.

Finance, Health Care, IT Stocks Lose Momentum as Hiring Slows

By Charles Thibault on February 2, 2010 in Business/Finance, Computer/Math/IT, Finance - XLF, Health Care, Health Care - XLV, Information Technology - XLK, S&P 500 - SPY.

Several stock market industry segments have taken hits over the past two or three weeks as the labor market situation deteriorated slightly during the second half of January.

Health Care stocks are down 2.9% over the last two weeks (XLV); Information Technologies stocks are down 9.5% over the last three weeks (XLK); and Finance stocks are down 7% over the last three weeks (XLF). The 4-week moving average of new unemployment insurance claims has gone up two weeks in a row.

Hiring in these three sectors – Finance, Health Care, and Information Technologies – has slowed in the past two weeks too, falling off the positive trend they started in September. What's worse, year-over-year hiring improvements have swung from positive to negative in these sectors.

The following analysis confirms a great Q4 in terms of GDP growth (+5.7% annualized), but also suggests that growth rates are slowing.

Let's first take a second to make sure we're not presenting conflicting information about the labor market situation, particularly compared to the Conference Board's Help Wanted Online series which uses the "same" data as we present here (HWOL). That series uses a "mid-month to mid-month" time-frame in order to match the BLS's sampling framework which measures national employment on the 14th day of each month. In early January, we did see some positive labor market signals. However, national Hiring Demand fell by 3.7% two weeks ago (after the HWOL sampling period closed). Since January 19th, the S&P 500 index has lost 4.3% too. This is after the S&P 500 gained 3.6% during the first couple of weeks of January on positive December UI claims data.

The following table compares year-over-year changes in sector Hiring Demand (the number of new online job ads) and weekly returns of sector Exchange Traded Fund (ETF). Sector ETFs are tradable securities which mimic the composition and returns of the different sector indices developed by Standard & Poor's. Sector indices are sub-components of the S&P 500.

Source: WANTED Analytics, Google Finance

S&P 500 Returns and Hiring Demand Highly Correlated

By Charles Thibault on October 28, 2009 in S&P 500 - SPY.

Financial Analysts can use the relationship between the number of online job ads and the S&P500 to forecast future stock market returns, as suggested by the strong relationship between labor demand and stock market performance.

Indeed, the correlation between S&P 500 returns and the number of online job listings has been 0.83 over the past 4 years.

Remember that the maximum correlation is 1, which indicates a perfect fit between two variables. What's more, a quadratic equation improves the fit to 0.88.

The economic theory is quite simple: more job openings means a better economy; fewer job openings means a weakening economy.

The following scatter plot shows yearly returns in the S&P500 index (NYSE:SPY) and year-over-year changes in the level of new online job listings ("Hiring Demand") on a weekly basis, as well as our "line of best fit":

2009-10-27 - Quadratic Fit for SPY HDI 2

Financial Analysts that currently use Unemployment Insurance Claims data in their models should note that the correlation between Hiring Demand and new UI Claims is -0.70, but, more importantly, this correlation increases to -0.76 when the one-week lagged value of Hiring Demand is used. This suggests that Hiring Demand leads UI claims and that models currently utilizing UI claims can be augmented with Hiring Demand Indicators.