Thursday, June 5, 2014

Misery & Stocks (excerpt)

Many years ago, economist Arthur Okun created the Misery Index. It is simply the sum of the unemployment rate and the inflation rate. It tends to peak at the start of bull markets and to trough at the start of bear markets. That cycle is mostly attributable to the similar cycle in the unemployment rate. The unemployment rate was 6.3% during April. I expect that it will fall to 5.5% by mid-2015. That should keep the bull running for another year, at least.

Of course, that scenario will also depend on inflation. I am using the core PCED inflation rate to calculate the Misery Index. It rose from a recent low of 1.1% during February to 1.4% during April. I expect it will remain subdued.

By the way, there is an inverse correlation between the Misery Index and the S&P 500 forward P/E. The drop in the Misery Index from 10.6% during September 2011 to 7.7% now certainly justifies the rebound in the P/E from about 10 to about 15 over this period.

Today's Morning Briefing: Sentimental Journey. (1) Lots of bulls. (2) Okun’s Misery Index. (3) P/E inversely correlated with misery. (4) Party on? (5) Neither boom nor bust. (6) Industrial commodity prices rising, while global export volumes falling. (7) China’s government still boosting growth, but jobs indicator remains weak. (8) Eurozone’s GDP recovery remains weak despite solid PMI readings. (9) UK benefitting from Eurozone’s woes. (10) US exports confirm global slowdown. (11) Focus on overweight-rated S&P 500 Transportation sector. (More for subscribers.)

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