Steve Blitz Morning Notes

The patterned relationship between the insured unemployment rate and the stock market (S&P 500) reveals that the "jobless" recovery means it is going to be a long time before the market gets back to its pre-recession high of 1560. Short-term cyclical relationship aside, the longer run picture for the insured unemployment rate suggests that the equity markets are going to be trading sideways in a range for a long time to come.

Elaborating the secular point, the accompanying chart shows the expected inverse relationship between the insured unemployment rate and the S&P 500. The market has been very good over the years of moving higher before the peak rate and reaching its cycle high just months before the rate hits its cyclical low.

Closer inspection of the chart reveals that ever since the 1982 recession the lows for the insured unemployment rate had been trending lower and the stock market cycled to new highs. During the current cycle we saw the insured unemployment rate bottom at 1.8% -- above the 1.6% low hit in 2000. At the same time, the S&P 500 was only able to eke out a top 2.8% above its previous cycle high -- 1527 in March 2000.

The equity market's stellar overall performance during those 20-odd years ending in 2000 was a catch up in value from the "lost decade" that preceded the 1980-82 recessions (a PE expansion thanks to disinflation). Disinflation and high real rates of growth kept pushing the insured unemployment rate lower. All of this was chiefly made possible by the strong dollar policy financing an inflow of foreign goods and capital that grew to unprecedented levels.

If, as Summers and others suggest, the recovery will be more balanced that means a competitively priced dollar, higher real interest rates, and less foreign inflows of capital to leverage up growth beyond the nation's ability to invest it in productive resources. Less leverage means slower growth and that means it will be quite some time before the insured unemployment rate drops to its coming cycle low. In addition, that low will be above the 1.8% low reached in 2006. What this means for the equity market is a long period of wandering in a trading range with little likelihood that the overall market will make new highs in the coming economic upturn.