AI Market Metrics
Job Losses May Mean
Market Gains
In the current “slow-growth, not no-growth” environment, the level of U.S. unemployment has
remained stubbornly high. Nevertheless, we have seen some progress in the jobs market and we expect to see more
in the year ahead.
There’s no doubt that economic growth and job creation
go hand in hand. Currently, there are a range of risks to
their sustainability. A protracted financial crisis in the euro
zone, coupled with an accelerating slowdown in China,
ongoing turmoil in the Middle East and, of course, the
political uncertainties of the upcoming November election
continue to be a drag on what would otherwise be a stronger economic and jobs market recovery.
How should the current unemployment levels impact
investment decision-making? To put today’s job market
progress in historical perspective, and to lend a sense of
our cautious optimism about it, we looked back at the
unemployment rate since 1948, the longest accurate data
set available. The chart below shows that, while there has
been a recent steep decline, the unemployment rate has
stubbornly lingered above 8% for the past three years. Only
Unemployment Rate 1948–2012
Higher Stock Returns
Accompany Higher Unemployment
12
Unemployment
Average
20
Total Return S&P 500 (%)
6
4
2
16
14
12
10
8
6
4
2
3/12
3/08
3/04
3/00
3/96
3/92
3/88
3/84
3/80
3/76
3/72
3/68
3/64
3/60
3/56
3/52
0
Source: Bureau of Labor Statistics
3-Months Before and After
12-Months After
18
8
3/48
Seasonally Adjusted (%)
10
0
two other times, in 1975 and 1982–1983, did the unemployment rate climb above 8%. In both cases, we saw a
sharp V-shaped recovery in employment. In the current
period, we’ve seen some declines, then several retracements followed by further declines.
While we would never recommend making a major
move based on a solitary market metric, a high level of
unemployment has proven to be a contrarian indicator for
stocks. In other words, periods with higher unemployment
are typically better times to invest in stocks, while lower
unemployment rates signal economies in full flush and are
often followed by lower stock market returns.
In the past, when the unemployment rate rose past 8%,
we saw marked market lows. In 1974–1975 we saw a generational low in the stock market (as represented by the
S&P 500 index). Between 1975 and 1980, stocks returned
Above 6.8%
6.8% & below
5.6% & below
Unemployment Rate
Sources: Bureau of Labor Statistics, Bloomberg, Morningstar
Analysis: Adviser Investments
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4.6% & below
over 100%. As unemployment rose to over 10% in 1982, the
markets saw the start of a nearly two-decade-long bull run
that ended with the 2000 tech bubble. And since February
2009, when the unemployment rate first hit 8%, the S&P
500 has returned over 100%. None of these were comfortable or “feel good” times for investors, but all proved to be
advantageous times to invest in stocks.
Examining the full unemployment dataset further tests
its contrarian signal. In the bottom-right chart on the previous page, we broke the data into four different categories—those where unemployment ran at 6.8% or higher,
periods when unemployment ran below 4.6%, and two
middling periods where unemployment ran at 6.8% and
lower, and 5.6% and lower. (The ranges chosen represent
the four quartiles into which we broke our data, as well as
the median unemployment rate for the entire data set.)
Finally, we calculated the stock market’s performance in
the three months before and after each period, as well as in
the 12 months following.
AI Summary
Our analysis demonstrates that the stock market tends
to have higher performance during and following periods
of higher unemployment. Moreover, the data also suggests
that when unemployment is below average, stock market
returns tend to be lower.
Investors who are waiting for an “all-clear” signal on
jobs may be doing themselves a disservice if they continue
to shun the stock market. We believe we are poised for further gains during 2012.
—AI Research Dept.
This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as
recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be
reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV
Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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