Weekly Claims Volatility Has Become the Norm, But the Underlying Trend Remains Steadily Sideways
Initial claims fell by 11k last week (7k net of the revision). This comes on the heels of the prior week’s increase of 37k. At 457k, the number reported today is right in line with the 450-470k range the series has occupied for all of 2010. On a rolling basis, the improvement was 4.5k bringing the rolling total to 452k. Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves.
The table below shows the price performance of each Financial subsector over four durations.
Below, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively. Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up. These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.
In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector. For composition of the subsectors, see Chart 5 below.
The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical.
Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared.
As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.
Joshua Steiner, CFA