Examine the points in history that the Shiller P/E has been above 18, the S&P 500 has been within 2% of a 4-year high, 60% above a 4-year low, and more than 8% above its 52-week average, advisory bulls have exceeded 45%, with bears less than 27%, and the 10-year Treasury yield has been above its level of 20-weeks prior. While there are numerous similar ways to define an “overvalued, overbought, overbullish, rising-yields” syndrome, there are five small clusters of this one in the post-war record: November-December 1972, July-August 1987, a cluster between late-1999 and early 2000, early 2007, and today. The first four instances preceded the four most violent market declines in the post-war record, though each permitted a few percent of additional upside progress before those declines began in earnest. We do not know what will happen in the present instance, particularly over the short-run. But on the basis of this and a broad ensemble of additional evidence, we estimate that the likelihood of deep losses overwhelms the likelihood of durable gains. To ignore those four prior outcomes as “too small a sample” is like standing directly underneath a falling anvil, on the logic that falling anvils are an extremely rare occurrence.
On the economic front, Friday’s employment report was interesting in that total non-farm payrolls (the “establishment survey” figure most widely quoted in news reports) came in slightly below expectations, but total civilian employment (the “household survey” figure used to compute the unemployment rate) jumped enough to produce a drop in the unemployment rate to 7.8%. While the difference was certainly an outlier in terms of typical correlations between establishment and household figures, it wasn’t the sort of outlier that would justify the suggestions of political conspiracy that were bandied about over the weekend.
The fact is that on a month-to-month basis, there is only a 50% correlation between the establishment and household employment figures, rising to about 90% correlation for year-over-year changes. The household data is notably more volatile, but the establishment figure makes up for the lower volatility with significant after-the-fact revisions, particularly around economic turning points. The month-to-month changes above and below the 12-month average are about 50% larger in each direction for the household survey than for the establishment survey. What’s interesting is that these changes are often matched by changes in the reported size of the labor force, which is why they don’t usually result in large changes in the unemployment rate from month-to-month. For example, in January 2000, the household figure jumped by over 2 million jobs, while the establishment figure increased by only 248,000 jobs. But the unemployment rate held steady at 4% because the reported labor force also increased by over 2 million workers.
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On the economic front, Friday’s employment report was interesting in that total non-farm payrolls (the “establishment survey” figure most widely quoted in news reports) came in slightly below expectations, but total civilian employment (the “household survey” figure used to compute the unemployment rate) jumped enough to produce a drop in the unemployment rate to 7.8%. While the difference was certainly an outlier in terms of typical correlations between establishment and household figures, it wasn’t the sort of outlier that would justify the suggestions of political conspiracy that were bandied about over the weekend.
The fact is that on a month-to-month basis, there is only a 50% correlation between the establishment and household employment figures, rising to about 90% correlation for year-over-year changes. The household data is notably more volatile, but the establishment figure makes up for the lower volatility with significant after-the-fact revisions, particularly around economic turning points. The month-to-month changes above and below the 12-month average are about 50% larger in each direction for the household survey than for the establishment survey. What’s interesting is that these changes are often matched by changes in the reported size of the labor force, which is why they don’t usually result in large changes in the unemployment rate from month-to-month. For example, in January 2000, the household figure jumped by over 2 million jobs, while the establishment figure increased by only 248,000 jobs. But the unemployment rate held steady at 4% because the reported labor force also increased by over 2 million workers.
Read the complete commentary
