U.S. unemployment remains elevated in Covid-19’s wake, but 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 14.7% last April, its highest level since the Great Depression. Things have improved since then, with the rate either falling or holding steady every month since, and now down to a far less-apocalyptic 6.3%. That’s still higher than it was at any point in the five years prior to 2020 (since March 2014, in fact). 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, dating back to February 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
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, 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 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 half since reaching 14.7% last April. What have stocks done during that recovery? Risen about 70%, 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 are just down from new all-time highs at a time when the coronavirus just passed the 500,000-deaths mark in the U.S. and unemployment remains well above historical 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 almost sure to be 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 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.
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.