Many years ago, economist Arthur Okun created the Misery index. It is simply the sum of the unemployment rate and the inflation rate. It tends to peak at the start of bull markets and to trough at the start of bear markets. That cycle is mostly attributable to the similar cycle in the unemployment rate. The unemployment rate was 6.3% during April. I expect that it will fall to 5.5% by mid-2015. That should keep the bull running for another year, at least.
Of course, that scenario will also depend on inflation. I am using the core PCED inflation rate to calculate the Misery index. It rose from a recent low of 1.1% during February to 1.4% during April. I expect it will remain subdued.
By the way, there is an inverse correlation between the Misery index and the S&P 500 forward price-to-earnings ratio. The drop in the Misery index to 7.7% now from 10.6% during September 2011 certainly justifies the rebound in the P/E to about 15 from about 10 over this period.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.