Sometimes the best models are the simplest ones. I don’t often touch on long-term investing strategies, but there are a few indicators of long-term equity growth that simply shouldn’t be ignored. One such indicator is initial jobless claims. Claims have a very high correlation with the S&P 500. I’ve broken down a simple chart to show how claims tend to be a reliable indicator of future stock prices. As you can see equities have tended to flounder when jobless claims are below 300K. This generally means the economy is humming. In terms of stock prices this means things can’t get much better. The inverse of this is what we’re seeing now. People are being laid off at a record rate and that’s a potentially bullish sign. It means that the economy is entering a period of under-capacity. Although it goes against every intuition you might have I think this is one more sign (in addition to my ER) that we are closer to the bottom than the top. If you have a long time horizon I think it’s best to ignore those people who are saying that buy and hold is dead. In fact, as I’ve repeated recently, buy and hold is likely more viable now than ever.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.