U.S. unemployment is still higher than it was before Covid, but is rapidly improving. And the latter fact matters much more, as this long-term unemployment-stock market correlation chart shows.
Thanks to Covid-19, America’s unemployment rate reached as high as 14.8% in April 2020, its highest level since the Great Depression. Things have improved greatly since then, with the rate either falling or holding (mostly) steady every month since, and now down to a far less-apocalyptic 4.2% as of November. That’s still higher than the 3.5% rate it had dipped to prior to Covid. But investors are focused on the improvements in the rate, and that’s reflected in the unemployment-stock market correlation.
Here’s what that correlation looks like on a 20-year chart (courtesy of Ycharts.com), dating back to June 2001. (The orange line is the S&P 500, the purple line is the unemployment rate.)
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The 20-Year Unemployment-Stock Market Correlation
This is certainly just a lesson in stock market basics. I realize that it’s not exactly like discovering fire to say there’s an unemployment-stock market correlation. When a lot of people are out of jobs and the economy is bad, of course stocks are low. And when the unemployment rate drops, of course stocks rise. But you may not have realized just how correlated they are.
Just look at that chart; the two lines are almost perfect inverses of each other, either criss-crossing or narrowing during major events such as the dot-com bubble burst at the turn of the century, the 2008-09 recession, in 2014 as the unemployment rate returned to pre-recession lows and stocks climbed to new highs, and, of course, the extreme movements from last March and April due to the coronavirus pandemic, when the two lines accelerated in opposite directions.
But look what’s happened since then.
The unemployment rate has been reduced by more than two-thirds since reaching 14.8% 20 months ago. What have stocks done during that recovery? Risen 108%, at least from the late March 2020 bottom. (The market is forward-looking, and thus anticipated “better” unemployment rates after April, which is why stocks started to improve before the jobs market did.)
So, if people are still scratching their heads as to why stocks keep hitting new all-time highs (despite some recent weakness) at a time when, thanks to the Omicron variant, Covid-19 cases are higher than ever both domestically and globally, inflation is at a 40-year high, and U.S. unemployment remains above pre-pandemic levels, just show them this chart. As long as the unemployment rate continues to fall, stocks will continue to rise.
A year from now, the U.S. unemployment rate is likely to be even lower than it is now. And that means stocks are likely to be higher. How much higher will likely depend on how many people are able – or willing – to get back to work.
Regardless of what happens, the relationship between jobs and stocks is clear. As the chart shows, the unemployment-stock market correlation has been a reliable inverse relationship for the last 20 years (and beyond). What happens to the jobs market in the coming months will be a clear indication of where stocks are headed next – and vice versa.
What do you think: Do you disagree that there is an unemployment-stock market correlation?
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!
*This post has been updated from an original version, published in 2018.