In Part 1 of this article, we discussed some similarities and differences in the evolution of the S&P 500 index before and after the 2001 and 2007 recessions. We have also shown that the current fall in the growth rate of working age population relative to that in 1990s and in the early 2000s cannot be responsible for the differences in the S&P 500 trajectories. In Part 2, we address the influence of labor force productivity on the stock market. There is always a question why should the growth in labor productivity accompany real economic growth as well as the stock market rallies?
Figure 1 reproduces the evolution of the S&P 500 index since 1982. An obvious feature of the curve is the presence of two peaks of the same amplitude in 2000 and 2007. We compared these peaks in Part 1 and tried (although failed) to relate them to the growth in working age population. Here we represent labor productivity in its differential form, i.e. as the rate of growth as reported by the Bureau of Labor Statistics. Therefore we also present the evolution of the S&P 500 index in the form of growth rate, which are usually called annual returns. From Figure 1, we calculate the relative S&P 500 change during a one year period. Since we use the monthly closing prices to represent the S&P 500 index, we also show the annual return at a monthly sampling rate.
Figure 2 shows the obtained return curve. The excellent agreement between peaks and troughs in Figure 1 is now destroyed because of small deviations in the slopes. Crudely, the overall behavior has many similar features as shown in Figure 3 where a copy (red line) of the original curve is shifted approximately six years and one quarter ahead in order to synchronize both peaks in the beginning of 2010.
Having clear similarities in the S&P returns during two previous recessions, we now can compare the evolution of the growth rate of labor productivity during the same periods. Figure 4 depicts the original curve (at quarterly rate averaged with MA(4)) and that shifted six years and one quarter ahead. There is no visible similarity between the curves and thus it is highly unlikely that the S&P 500 index has any traction with labor productivity. Hence, one should not consider labor productivity data when predicting the S&P 500 return.
Interestingly, the shape of the 1991/1992 recession fits much better the overall trajectory of the productivity growth during the 2007 recession. Moreover, the whole period between 2000 and 2010 is matched very well. It is a good question will the red curve continue to represent the future growth in labor productivity? It is worth noting once again that labor productivity does not drive the stock market.
Figure 1. The evolution of the S&P 500 index since 1982.
Figure 2. The evolution of the annual S&P 500 return at a monthly sampling rate.
Figure 3. Comparison of the 2001 and 2007 recessions. The original (black) curve was shifted ~6.25 years ahead (red curve) in order to synchronize both peaks in 2010. Crudely, the overall behavior during both recessions is similar.
Figure 4. The growth rate of labor productivity: the original curve (black) and that shifted six years and one quarter ahead (red line).
Figure 5. The growth rate of labor productivity: the original curve (black) and that shifted seventeen years ahead (red line).