Thanks to Covid-19, America’s unemployment rate reached as high as 14.7% in April 2020, its highest level since the Great Depression. Things have improved dramatically since then, with the rate either falling or holding (mostly) steady every month since, and now down to 3.6% as of March - basically where it was before the pandemic began. What’s happened to stocks in the last two years is evidence of the unemployment-stock market correlation at play.
Here’s what that correlation looks like on a 20-year chart (courtesy of Ycharts.com), dating back to April 2002. (The orange line is the S&P 500, the purple line is the unemployment rate.)
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 March and April of 2020 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 roughly three-quarters since reaching 14.7% two years ago. What have stocks done during that recovery? Risen 92%, 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 not far off all-time highs (despite some recent weakness) at a time when the Covid-19 pandemic is still lingering, inflation just keeps getting worse, and the worst European war in decades has been raging in Ukraine for the past six weeks, just show them this chart. As long as the unemployment rate continues to fall (or at least not go up again), stocks will continue to rise.
The U.S. unemployment rate can’t go much lower now. It just needs to stay about the same. If it does, stocks will likely go higher.
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?
*This post has been updated from an original version, published in 2018.