There is no getting around the fact that unemployment rates are way too high – that’s especially true if you’re one of those looking for a job!
Last Friday’s announcement that far fewer jobs were created than expected sent the stock market into the tank. Only 18,000 jobs were created. Economists expected 80,000. Is it a sign of things to come? Is the market headed lower?
Well, obviously I have no idea about the future of the stock market, but I love looking back at history to see if I can learn something. Intuitively, you’d expect that when people aren’t working they have less money to spend. When people have less money to spend they buy less, and (obviously) companies don’t sell as much. And when companies don’t sell as much, their profits nosedive. Finally, when profits disappear, share prices should plummet. This seems as logical as ice melting in the hot July sun.
So it would be reasonable to expect to see high unemployment rates foretell
lower stock prices. Right? Let’s take a look and see what happened in the past. Here’s a chart that depicts unemployment rates over the last 60 years. You can see that rates peaked just above 10% in 1982.
Now, let’s take a look at what happened to the S&P when unemployment hit these highs.
Do you see the same thing I do? Just when unemployment rates peaked, the market actually took off. So now that unemployment is flirting with those highs of the past, am I suggesting that the market is in for a great ride from here on out? I don’t think so.
But neither would it be reasonable to conclude that the market is doomed because of these very high (and unacceptable) unemployment rates. The point I’m really trying to make is that high unemployment doesn’t predict stock market results.
Certainly there will be ups and downs ahead. And indeed, the market may decline. But the past shows us that it’s unreasonable to conclude that the market is headed for extended declines because of high unemployment.
What’s your take? Do you believe high unemployment rates are going to drive the stock market lower? Why?
GoYanks says
July 11, 2011 at 7:35 AMUnemployment rate is supposed to be lagging indicator. It follows profitability (and hence the stock market). When companies are more profitable (and hence better stock price), they have more money to invest in growth, and that leads to hiring more people and lowered unemployment rate.