Misery index suggests that stocks have more room to rise
The misery index, as the name suggests, is designed to measure the level of wretchedness felt by ordinary people in the economy. Created by Yale economist Arthur Okun some years ago, it’s calculated by adding the U.S. unemployment rate to the prevailing inflation rate.
Since fear of job loss and shrinking purchasing power through inflation have pervasive effects on the lives of most workers, the index is considered to be a good snapshot of the real economy.
As inflation rises the cost of living increases and, as unemployment rises, more people cross the economic line into poverty.
In both Canada and the United States, the index peaked well above 20% in the early 1980s, largely due to incredibly high inflation. More recently, the 2013 number is around 9 down from a recent peak of 12.9% in November 2011 which is up slightly from a month ago when it was 8.6%.
All of which is good for stocks, claims strategist Ed Yardeni, who took a look at how the misery index has matched up with with bull and bear markets.
Stocks usually rose when the index held steady or dropped going back to 1960s, fuelling the view that the stock market, particularly in the US, can move higher from here.
"In the past, bull markets in stocks tended to occur when the misery index was falling, or at least not rising," Yardeni says. "The index is down from a cyclical peak of 11.8% during March 2010. Odds are it will remain around 8.5% through the end of next year. If so, then it suggests that the current bull market may last at least until then, if not longer."
Do you think the current bull market phase still has legs? Have you beentaking advantage of the current run?
By Gordon Powers, MSN Money
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