Gauging The Stock Market With The Tocalino Index

bruegel-wedding-dance-ouMy Comments: Football season is about to start, Ukraine is still bothered by the Russians, and Ferguson, Missouri is still a mess. So here I am talking about the stock market and an index I have never heard of before. I suspect you haven’t either.

But there is reference here to the Misery Index, which I have heard of, though never followed. It’s the sum of the unemployment rate and rate of inflation. Right now it’s pretty low in historical terms and getting lower. That’s good.

My next question has to do with why so many of us think the world is coming to an end. Well, maybe it is, but I doubt it. A changed world, definitely, but one we must adapt to and stop with the constant message of doom.

By Sebastiao Buck Tocalino, August 12, 2014

• Here I’m gauging the performance of the Dow Jones Industrial Average with the Help of the Tocalino Index (applying demographics to a variation on Arthur Melvin Okun’s Misery Index).
• The point that stands out recently is the noticeable gap between the rapid rise of the Dow Jones index and the lagging behavior of my own indicator from 2009 onward.
• The market seems to be feeding more on some sort of paranoia or complacency from the lack of investment alternatives than any demographic, business and economic fundamentals could ever support.

Among the many indicators that track the health of the economy, two are very popular due to the obvious affliction they may inflict on all of us regular Joes and Janes. They are: the inflation rate and the unemployment rate. Between the two of them, inflation is often the most conspicuous. After all, we routinely have to reach for our wallets to pay for our daily needs and those of our children, including education and a variety of goods and services. But, if the unemployment rate is somewhat less followed by those who hold on to a steady job, it is still the most distressing for the less fortunate ones who are out of work!

Arthur Melvin Okun was a professor of economics at the famous Yale University, later he was also an important economic advisor to presidents John F. Kennedy and Lyndon B. Johnson. Besides “Okun’s Law,” another well-known contribution of his to the tracking of economic trends was the Misery Index. Its formulation could not be any simpler or more intuitive: it was just the sum of the unemployment rate and the inflation rate. Naturally, to be out of work and having to cope with an escalating cost of life is a sheer disastrous situation leading to social distress, therefore the obvious choice of name for this indicator: the Misery Index.

(Some economists may say that, with a delay of one year or so, this Misery Index, with its implicit social distress, would be a contributing factor to swings in the rate of crimes. I tend to believe that crime is still more related to cultural issues.)

Personally, I don’t usually pay much attention to this index and believe that few people actually do. Though we pay close attention to its two constituents separately. But for some time recently, I have been glancing at the Misery Index and its downward trajectory in the U.S. It is clear that, in spite of all the insane efforts in printing money and keeping real interest rates negative and punitive for the more cautious and conservative majority of savers, inflation is still modest and below the target aimed by the FOMC and the Federal Reserve. By the end of June, the twelve-month inflation climbed a tad higher at 2.07%. Data relative to the closing of July is scheduled to be released only on Aug. 19.

At the closing of June, to the cheers of everyone, the unemployment rate had also fallen to 6.1%. It did rise slightly to 6.2% in July, as reported on Aug. 1.

Trying to avoid much of the noise in inflation data, I will adopt from now on the 12-month core inflation rate, which excludes the more disruptive cost swings of food and energy (due to the villainy of oil prices). The core inflation for the 12 months ended last June was of 1.93%. By using that same month’s unemployment rate of 6.1%, the sum has resulted in an 8.03% Misery Index.
Misery Index