The Yield Curve And Stocks: Much Ado About Everything

There has been a great deal of chatter about the strength of the American job market. And with good reason. Most measures of employment health – U-2 unemployment rate, jobless claims, wage increases, year-over-year job growth, etc. – support the notion that U.S. workers are “winning.”

On the other hand, very few folks have addressed the possibility that the data are more likely to weaken than strengthen. On the contrary. So much faith is being placed on tax cut stimulus that few discuss the potential erosion of employment prospects.

For example, when the U-2 unemployment rate in May hit a business cycle low of 3.8%, the financial media cheered. When it rose to 4.0% in June, the media applauded even louder, surmising that it was a sign that more people were coming back into the labor force.

Down is great? Up is great? What, then, would be a poor month for unemployment data?

There is, of course, another explanation. Perhaps 3.8% represented a business cycle unemployment low. In fact, unemployment rate troughs tend to precede economic contractions and/or stock bears by about one year.

The unemployment low in the previous expansion was 4.4% (October 2006). The recession officially began in December of 2007, while the bear market for stocks began in October of 2007.

Similarly, a U-2 unemployment low of 3.8% occurred in April of 2000. Ironically enough, the stock bear had already started in March of 2000 and the recession was only one year away (March, 2001).

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Dig a little deeper into recent history and one discovers a variety of intriguing observations. For example, sharp slowdowns in job growth have preceded recessionary environments. This transpired in 2000. It also occurred in 2007 leading into the financial collapse.

What is not necessarily talked about is the timing of precipitous slowdowns in job growth. For example, the inversion of the Treasury bond yield curve in 2000 and again in 2006 seemed to kick off dramatic retreats in year-over-year percentage job increases. Eventually, job growth turned negative alongside economic recessions.

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Disclosure: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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