Stronger Stocks When Unemployment Is High

The record setting bull market in stocks since 2009 reached a parabolic climax in February. The first quarter culmination was particularly amazing in that the US economy had been slowing for months and the growing Covid pandemic had already shut down China and begun moving into the rest of the world.

When the pandemic exploded onto the scene in the US in March, the adage “the bigger they are the harder they fall” came to mind as stocks fell faster than any bear market in history. The good news is the “the harder they fall the bigger the rally” converse is also true. In fact, the only thing better for stocks than bad economic news is even worse news when it come to the job market. Unemployment claims rose an astounding 23 million from mid March to early May during the heart of the government-mandated shutdown of the economy. More surprising to some was that such bad news on the job front was good news for investors.

When unemployment is low – full employment – stock values are vulnerable. Likewise, when unemployment is high, it’s a good time to open your Robin Hood account and buy stocks. The higher the unemployment the stronger the ensuing stocks gains. In the age of zero-bound interest rates and unlimited printing of money, it’s logical, if not required, that maximum Federal stimulus and liquidity will be added to the economy. During the bursting of the mortgage bubble in 2008 and the financial crisis that ensued, massive government intervention along with central bank money creation was applied to prevent a deflationary depression. As Unemployment rose above 8% the stock market bottomed and began an historic bull market run. The bull continued for years as unemployment began receding from its recession-level peak of 2010. 

During the recent record transition from bull to bear and back to bull market again in March and April of 2020, it was again a great time to invest in stocks as unemployment leapt higher. While 14.7% unemployment is near Great Depression levels, it likely grossly understates the job market trauma as millions on the current payroll are not working. Many idled workers are being retained with government assistance under the assumption that they will be needed soon. Those not working may have exceeded 20% at the peak, but as long as the government sends out payroll protection money, the pain levels can be tamped down until the economy warrants everyone returning to work. For now, uncertainty means more safety nets, handouts and rising cash to invest. A record number of jobs were created in June, knocking official unemployment down to 11%, but there is a long way to go and plenty of time for stimulus to keep supporting the economy and stocks.

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Disclaimer: This report may contain information on investments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this communication ...

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