People, en masse, are a powerful force.
That’s the Dent Research thesis in a nutshell.
We’ve long shown how people’s predictable spending patterns drive economic booms and busts. Since consumer spending makes up around 70% of developed nations’ GDP, “as consumers go, so goes the economy.”
The same people-driven trends can be seen in the education sector.
For instance, historical patterns have shown that enrollment in higher education tends to tick higher alongside unemployment rates. This correlation has a logical basis, for a few reasons:
- Unemployed job-seekers know their chances of securing a position increase once they obtain additional degrees (as does their earning potential)
- Unemployed job-seekers, arguably, have “time to spare,” assuming their job search doesn’t consume more than 40 hours a week
Another (more insidious) incentive for the unemployed to enroll in higher education is their eligibility to receive student loans… the proceeds of which are supposed to be limited to educational expenses, although who’s to know if a bit is used to pay the rent or buy groceries, right?
Regardless of the reason, here’s a chart that shows the correlation between the U.S. unemployment rate and the stock price of online education pioneer, Apollo Group (Nasdaq: APOL), which operates University of Phoenix. (If you watched this year’s Super Bowl, you know it was played in University of Phoenix Stadium, in Phoenix, AZ.)
Stock prices are inherently more volatile than unemployment rates, so I’ve taken a 12-month average of Apollo Group’s stock price (in orange) to smooth that out. And I’ve plotted the U.S. unemployment rate (in blue) alongside.
As you can see, the correlation between these two data streams is remarkably high, at around 90% (i.e. 0.9). However, the magnitude of Apollo Group’s share price gains, in response to rising unemployment, has varied over the last decade.
From January 2000 to June 2003, the unemployment rate climbed from 4% to a peak of 6.3%. Meanwhile, the 12-month average of Apollo Group’s share price gained a whopping 320% during this time ($11 to $47). And even after the unemployment rate peaked, Apollo’s stock continued to climb, to as high as $93 in May 2004.
World-renowned economist Harry Dent now says, “We’ll see an historic drop to 6,000… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse, gold will sink to $750 an ounce and unemployment will skyrocket… It’s going to get ugly.”
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The next round of joblessness didn’t treat Apollo’s stock equally well.
Between March 2007 and October 2009, unemployment increased from 4.4% to 10% — or three percentage points more than the 2000-2003 increase. But Apollo Group’s stock only climbed from $46 to $70, a gain of around 50%, during this time.
What’s my point?
Well, finding correlation-based relationships, such as this, can provide a hugely valuable timing tool over sufficiently long-term horizons. But, the magnitude of future price moves don’t always compare to previous ones.
Still, this is one example of the people-driven brand of economics we practice at Dent Research. And it’s this type of analysis that you find in our flagship newsletter, Boom & Bust.