When new employment data comes out, investors in large part tend to take it at face value. But revisions to this data are often just as important as the initial releases, as they can dramatically reshape the narrative around the health of the US economy, for better or for worse.
According to Michael Kantrowitz, the chief investment strategist at Piper Sandler, strong initial unemployment claims data that ended up being revised downward has gotten investors into trouble in prior recessions. And he suspects it’s happening again.
In a recent note to clients, Kantrowitz highlighted unemployment claims data leading up to the Great Recession. Taking the data as it was reported then, claims didn’t look like they started on an uptrend until February of 2008. But looking at the revised data, a clearer trend starts in September of 2007, he said.
Initial data shows that jobless claims were under 300,000 in September 2007, then rose to around 350,000 in November before falling back to around 300,000 in January 2008. In the revised data, jobless claims went from a little above 300,000 in September 2007 to 360,000 in December, and fell to 320,000 in January 2008 before ticking back upward. Basically, the revised data is less volatile and shows a clearer uptrend.
“If you look at claims back in 2007 and 2008 you’ll see a VERY different story from today’s revised data compared to what investors knew AT THE TIME,” Kantrowitz said in the October 4 note, the emphasis his.
He linked to Wall Street Journal articles from January 26, 2008 and January 29, 2008 that show a relatively calm outlook despite the carnage that was coming.
In the first week of October, jobless claims were very low at 209,000, and there’s been a general trend downward in claims since they peaked in June at 265,000.
But Kantrowitz, who was ranked as the third-best strategist on Wall Street in an October 2022 Institutional Investor survey, still sees unemployment claims eventually trending upwards, and still counts a recession as his base-case scenario. In recent months, he’s pointed to indicators like slowing manufacturing activity and the inverted Treasury yield curve as evidence a downturn in coming.
He just thinks some market onlookers aren’t being patient enough. Looking at prior yield curve inversions, it’s taken more than 12 months for jobless claims to start to meaningfully trend upward.
“A popular pushback against a hard landing call is that ‘it’s taking a long time for employment to weaken.’ Is it?” Kantrowitz asked. “When you look at the inversion of the yield curve as a starting point, we are well within the window of rising claims compared to the few recessions we’ve seen.”
Piper Sandler
Another indicator that tells Kantrowitz that jobless claims are going to start increase is — interestingly enough — furniture sales. Data from The Conference Board shows that spending on furniture as a percentage of overall spending (shown by the inverted blue line in the chart below) is now falling, suggesting consumers are feeling pinched. Historically, this has meant unemployment claims will increase.
Piper Sandler
What does this mean for stocks?
Kantrowitz has a 2023 year-end price target range of 3,600-3,800 for the S&P 500. With the index currently around 4,320, a drop to 3,600 would be a 16% decline. But that’s for the arbitrary cut-off date of December 31, 2023. Kantrowitz said in an email on Friday that he does not yet have a 2024 target.
Looking back to prior recessions, stocks have suffered, on average, bigger declines than a 16% drawdown. According to RBC, the average S&P 500 decline during the last 13 recessions has been 32%. But the range of outcomes has been wide, with pullbacks of 15% to 57%. Stocks fall in a recession because unemployment rises and consumer spending falls, hurting corporate earnings.
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