What the Jobless Data Say About Stock Performance

If history is any guide, equities will fall before the next recession and uptick in the unemployment rate.

Ripple effect.

Photographer: Justin Sullivan/Getty Images

By all accounts, the U.S. employment picture continues to brighten. The monthly report released May 5 showed that the rate fell to 4.4 percent in April, the lowest it’s been in 10 years. It’s hard to believe that it was in double-digit territory in late 2009.

The economic recovery has been slow, if not consistent. Conditions continue to be not too hot and not too cold, making it difficult for those predicting excesses in the economy or a coming recession.

Here is a look at the unemployment rate starting in the late 1940s:

Going back to 1948, the unemployment rate has spent a little more than one-fifth of the time under 4.5 percent. It stayed under that level for quite some time in the 1950s 1 , again in the late 1960s and early 1970s, but failed to breach that level again until late 1998. The rate dipped to 4.4 percent in 2006 and 2007 for a short time before blowing up again during the financial crisis.

The unemployment rate at current levels has a mixed record as a forward-looking indicator for stock market performance. Here are the average annual returns for the S&P 500 from 1948 to 2017 when the unemployment rate was above and below 4.5 percent:

The short-term returns are fairly similar, but we start to see a much stronger relationship going out three, five and 10 years. It’s not the end of the world, but average longer-term returns were much lower going forward from low levels of unemployment.

The relationship between the unemployment rate and subsequent stock market returns becomes even more pronounced when we break down the rates into further segments:

You can see a nice increase in average annual performance with each step up in the beginning unemployment rate.

This is the paradox of successful investing. When the economy is doing terribly, it’s typically a great time to invest, but no one wants to put money to work at that point because things could always get worse. And when things are going swimmingly with the economy it’s typically a time to temper your expectations, but no one wants to do that because things could always get better.

Since things have been going well with the economy for a while now, many investors have shifted their worries from what future returns will be to when the next bear market will occur. When looking at the link between historical bear markets and the unemployment rate, we start to see a different relationship emerge. The following chart shows the unemployment rate over this same time frame along with the gray shaded regions that depict when the S&P 500 was in bear-market territory:

There are exceptions to every rule in the markets, but you can see that the onset of many of the longest bear markets was typically a leading indicator for a rise in the unemployment rate. You can see that unemployment rose significantly during more than half of the bear markets over the past 70 years or so.

The variable that will likely impact whether the next bear market and rise in unemployment rate are short-lived or long-lasting will be when the economy contracts and goes into a recession. The stock market doesn’t have a perfect forecasting record for these events. There’s an old joke that stocks have predicted nine out of the last five recessions.

If history is any guide, the stock market will fall before we see the next recession and uptick in the unemployment rate. Investors should also expect to see below-average long-term returns in stocks from current levels. They’re no fun to live through, but the next huge buying opportunity will likely come from a recession. When that happens is anyone’s guess.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  1. The lowest reading from Federal Reserve data was in 1953, when the unemployment rate hit 2.5 percent.

To contact the author of this story:
Ben Carlson at

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Max Berley at

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