The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

by Mike Kimel

The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio

A few weeks ago, I had two posts looking at the relationship between the S&P 500 and real GDP (Part 1 and Part 2).

The first post noted that using data from 1950 to the present, the adjusted close of the S&P 500 appears to lead real GDP by about 10 quarters... and real GDP appears to lead the S&P 500 by 16 quarters. That is, each factor appears to influence the other with a lead time of a few years. In the second post, I noted that while the S&P 500's influence over real GDP appears to have remained relatively stable over the decades, real GDP's influence over the stock market seems to have gone by the wayside some time in the 1970s.

Today's post is similar to Post #1, but instead of looking at how the S&P 500 influences real GDP and vice versa, it looks at the relationship between the S&P 500 and the civilian employment to population rate.


The adjusted close for the monthly S&P 500 comes from Yahoo. The employment to population ratio is generated by the Bureau of Labor Statistics, but I pulled it off the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve's St. Louis Branch. Monthly data is available for both series - data for the S&P 500 was available going back to 1950, and the employment to population ratio was first computed in 1948.

Following the same practice as in Post #1, I computed the correlation between the S&P 500 and the employment to population ratio, the correlation between the S&P 500 and the employment to population ratio lagged one month, the correlation between the S&P 500 and the employment to population ratio lagged two months, and so on, all the way through 15 years worth of lags. I also computed the correlation between the employment to population ratio and lags of the S&P 500. Graphically, it all looks like this:

Figure 1.

The graph shows that the S&P 500 doesn't seem to lead the employment to population ratio. The correlation between the S&P 500 and the employment to population ratio in the same period exceeds the correlation between the S&P 500 and any lagged employment to population ratio.

However, the employment to population ratio does appear to lead the S&P 500... and the correlation is highest at about 123 months... or about ten years. In other words, the share of the population that is employed seems to lead the stock market, with the strongest effect generally being observed ten years out.

I'll be looking at how stable that result is in the next post in the series, but for now, let's just take it on faith that the result doesn't just go away when we change the dates in our sample. So... assuming the results are stable, they suggest the following story: more employed people mean more people putting money in the stock market, more people buying stuff, and more companies making stuff. Nevertheless, all these good things happening take a while to have an effect on stock prices. In fact, a ten year lag time seems to indicate that the benefits of more employment don't get felt until the next business cycle comes around.

Now the really bad news... here's what the employment to population ratio looks like:

Figure 2.

I note a few sorry portents....
1. The employment to population ratio peaked at 64.7% in the year 2000.
2. Its since dropped quite a bit, and is now at a level last since in the 1980s.

Anyway, in closing, a few more notes
a. I am not an investment adviser. I'm merely looking at some historical correlations, and this is only part of the story. I would strongly advise against trading on this information.
b. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel - with one m only), and I'm at gmail.com.







The Historical Relationship Between the Economy and the S&P 500, Part 3: The S&P 500 and the Employment to Population Ratio


A few weeks ago, I had two posts looking at the relationship between the S&P 500 and real GDP (Part 1 and Part 2).

The first post noted that using data from 1950 to the present, the adjusted close of the S&P 500 appears to lead real GDP by about 10 quarters... and real GDP appears to lead the S&P 500 by 16 quarters. That is, each factor appears to influence the other with a lead time of a few years. In the second post, I noted that while the S&P 500's influence over real GDP appears to have remained relatively stable over the decades, real GDP's influence over the stock market seems to have gone by the wayside some time in the 1970s.

Today's post is similar to Post #1, but instead of looking at how the S&P 500 influences real GDP and vice versa, it looks at the relationship between the S&P 500 and the civilian employment to population rate. The adjusted close for the monthly S&P 500 comes from Yahoo. The employment to population ratio is generated by the Bureau of Labor Statistics, but I pulled it off the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve's St. Louis Branch. Monthly data is available for both series - data for the S&P 500 was available going back to 1950, and the employment to population ratio was first computed in 1948.

Following the same practice as in Post #1, I computed the correlation between the S&P 500 and the employment to population ratio, the correlation between the S&P 500 and the employment to population ratio lagged one month, the correlation between the S&P 500 and the employment to population ratio lagged two months, and so on, all the way through 15 years worth of lags. I also computed the correlation between the employment to population ratio and lags of the S&P 500. Graphically, it all looks like this:






Figure 1.


The graph shows that the S&P 500 doesn't seem to lead the employment to population ratio. The correlation between the S&P 500 and the employment to population ratio in the same period exceeds the correlation between the S&P 500 and any lagged employment to population ratio.

However, the employment to population ratio does appear to lead the S&P 500... and the correlation is highest at about 123 months... or about ten years. In other words, the share of the population that is employed seems to lead the stock market, with the strongest effect generally being observed ten years out.

I'll be looking at how stable that result is in the next post in the series, but for now, let's just take it on faith that the result doesn't just go away when we change the dates in our sample. So... assuming the results are stable, they suggest the following story: more employed people mean more people putting money in the stock market, more people buying stuff, and more companies making stuff. Nevertheless, all these good things happening take a while to have an effect on stock prices. In fact, a ten year lag time seems to indicate that the benefits of more employment don't get felt until the next business cycle comes around.



Now the really bad news... here's what the employment to population ratio looks like:




Figure 2.


I note a few sorry portents....
1. The employment to population ratio peaked at 64.7% in the year 2000.
2. Its since dropped quite a bit, and is now at a level not seen since the 1980s.

Anyway, in closing, a few more notes
a. I am not an investment adviser. I'm merely looking at some historical correlations, and this is only part of the story. I would strongly advise against trading on this information.
b. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel - with one m only), and I'm at gmail.com.