Unemployment and the Stock Market Following a Familiar Path

Friday, July 9, 2010

Concerns continue to surround unemployment, particularly with the stock market’s recent decline. However, the unemployment and stock market patterns are continuing to follow a “normal” route. Here is how this period compares to others.

The graph below shows the monthly unemployment rate from 1950 compared to the trailing 12-month return for the Standard & Poor’s 500 Stock Index. The highlighted areas show the stock market’s performance when the unemployment rate hits its high point.

Note how our current pattern resembles the previous ones. Even the recent stock market results are similar.

I previously wrote about unemployment as being a lagging indicator in:

The table below provides the data for each of the nine peaks highlighted above. The last two columns show the return and time lapsed from the stock market’s trough to the unemployment peak.

Note that each period’s results vary, particularly the time from stock market bottom to unemployment peak. There are two main reasons:

  • The conditions surrounding the economy and corporate earnings are different
  • The stock market index’s composition differs from the factors affecting unemployment

So… Thus far, the stock market and unemployment rate pattern are following a familiar path, with neither indicating trouble ahead.

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