Quite the understatement here but the market has been in a very rough patch. Sideways for most of 2023 with the occasional spike in volatility. However we're always looking for developments within the markets and one has crossed my screens this week that I am not really that excited about. It's quite an obscure ratio. We're talking here about the Quits versus the Layoffs and Discharges.
The ratio is actually incredibly simple to interpret. The ratio basically (for me) reflects the overall health and dynamics of the labor market. When more people are quitting their jobs (quits) than being laid off (Layoffs and Discharges), it typically indicates that there are more job opportunities available and workers have more leverage to choose better jobs. On the other hand, when more people are being laid off than quitting, it suggests a weaker job market with limited opportunities, and workers may have less bargaining power when it comes to their employment.
The interesting part is that this ratio like so many others can be plotted on a chart which gives us even more information. Unfortunately for us, the economic data provided by the federal reserve on Quits and Layoffs only goes back to the year 2000. So, we do have a limited amount of data available to us to analyze and backtest. However, despite the limited availability it is still extremely useful. Below you can take a look at what the ratio looks like when plotted on a chart.
Of course we're not here to talk about employment, we're interested in what this all means for our own investment portfolios or trading opportunities. A quick glance at the ratio above and an experienced trader will be able to connect the dots fairly quickly. It is again very simple to connect this ratio with the stock market. If more people are quitting their jobs than being laid off, it can indicate that the labor market is strong, and workers have more confidence in their ability to find better jobs. This, in turn, can lead to higher consumer spending, which can drive corporate profits, etc.. On the other hand, if more people are being laid off than quitting, it suggests a weaker labor market, which could lead to decreased consumer spending and lower corporate profits, which, you guessed it, means a downturn in the prices of stocks.
If you're an even niftier trader you might have already figured out that this means we're talking about an indicator that has leading tendencies. Which it very much is when looking at some of the previous occurrences. To really put this relationship in perspective I've plotted the ratio and the S&P 500 index on the same chart below. Now it becomes very clear what the ratio can signal us.
We do have quite a limited amount of data available as I've mentioned before but regardless we do see the relationship between the ratio and the S&P500. Most recently the ratio has declined very aggressively with the amount of layoffs occurring in the US. Forbes has a good overview of the companies that are laying off workers which you can find here. A decline in the Quits/Layoffs ratio of this magnitude usually pulls the stock market with it. Note the divergences as well before the 2008 and 2020 declines. The labor market gave investors a warning signal at the time. We haven't really seen a true divergence this time around so that is something we do need to take into account.
Is this important information? We can't say for certain. An increase in layoffs might have already been priced in, we unfortunately lack the data needed to form a confident projection. All we can do is try to anticipate with the info we do have. What are your thoughts on this? Make sure to comment below or send an email via the contact form! We would love to hear from you!