The Unemployment-Stock Market Correlation in One Chart

U.S. unemployment is near its highest level since the Great Depression. What does that mean for stocks? Nothing good, according to the unemployment-stock market correlation chart.

Thanks to Covid-19, America’s unemployment rate is at 13.3%. That’s actually better than the 14.7% rate from April. So it’s only the second-highest monthly rate since the Great Depression. Given that grim reality, what do such historically high unemployment numbers mean for stocks? The unemployment-stock market correlation paints an unfavorable picture.

Here’s what that correlation looks like on a 30-year chart, dating back to June 1990. (The orange line is the S&P 500, the blue line is the unemployment rate.)

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The 30-Year Unemployment-Stock Market Correlation

Thirty years of history show that the unemployment-stock market correlation is almost a perfect inverse relationshipI 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, criss-crossing 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 this March and April due to the coronavirus pandemic.

The S&P ‘s initial top, in April 2000, came at a time when the U.S. unemployment rate had fallen just below 4%. In the ensuing three years, unemployment rose steadily to 6.3%, and stocks entered a three-year bear market.

Boom times returned, and stocks hit new highs as the unemployment rate dipped back to the low 4% range by 2007. We know what happened next: the subprime mortgage crisis hit, unemployment spiked to 10% and a full-on market crash ensued. Then came the long recovery, which gave way to one of the longest bull markets in history, one that spanned more than a decade and didn’t end until coronavirus caused it to come to a screeching halt this March.


Which brings me to what has happened to stocks since the late-March bottom.

Did Wall Street See the May Jobs Improvement Coming?

As we know, the S&P plummeted more than 34% in five weeks as Covid-19 shut down the U.S. economy, forcing more than 40 million people to lose their jobs. Because the market is forward-looking, it crashed well before the historically bad April jobs report came out in early May. In the two and a half months since, stocks have recovered most of those losses, and the S&P is now just 5.5% below its February all-time highs.

Now that we know that the May jobs numbers were surprisingly improved from the April ones, that recovery makes more sense. However, as 30 years of history on this chart tells us, stocks won’t continue to rise unless the unemployment rate continues to fall sharply, considering how historically high it remains. Only a falling unemployment rate translates to rising share prices. As America re-opens, at least to a degree, the speed at which certain businesses open their doors and people return to work could determine how long stocks continue to rise.

But that’s also a double-edged sword. If America re-opens too quickly, and the infamous second wave of coronavirus sends people and businesses back into lockdown, it could send stocks plummeting again.

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 30 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.

Chris Preston

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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.

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*This post has been updated from an original version, published in 2018.


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