Is low unemployment good or bad for stocks?
If the best answer you had on tap was a shrug, don’t worry. Most people don’t spend their days thinking about the unemployment rate or what it means for markets.
Let’s be honest with each other… These kinds of economic discussions get boring fast. But they’re still worth investigating. In the case of unemployment, it’s for an important reason…
The unemployment rate can help us predict the end of the bull market.
Today, unemployment is incredibly low. You might think this means things are getting “too good”… that it means the eventual peak is near. But as we dig deeper, we find it’s actually broadcasting a hidden signal – one that upends the conventional thinking on this topic.
So, let’s roll up our sleeves… take a look at today’s record-low unemployment… and figure out exactly what it means for the market and the Melt Up that’s underway.
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The Melt Up is the final push of a major bull market. It’s a furious blow-off top, where the biggest gains of the boom can rack up fast.
You want to get every last bit of upside that you can. And that makes today’s “boring” economics lesson even more important.
Simply put, it tells that the conventional wisdom is a bit off – and that the Melt Up has further to run than many would believe.
The economics nerds among us are left wondering, “What does today’s record-low unemployment rate have to do with the Melt Up?”
Generally speaking, low unemployment precedes a financial crisis. That might seem a bit counterintuitive. But think about it…
Times are best before they get bad. That’s it.
With that in mind, you’d probably look at today’s record-low unemployment rate and think that the end is near. Take a look…
It’s true that unemployment is now near a historic low. It’s the lowest it has been in 50 years, even before this chart begins… And it’s well below what we saw before the dot-com bust or the Great Recession.
You can also see that over the last 30 years, unemployment hit multiyear lows before the recession started. That makes it pretty obvious…
Ultra-low unemployment precedes recession. And the chart above tells us that the next recession (and stock market bust) should be right around the corner.
It’s not quite that simple though.
Yes, we are in the final innings of this bull market. And no, it can’t go on forever. But there’s something interesting going on behind the scenes.
Low unemployment isn’t the only labor record we’re seeing right now. We’re also seeing record numbers of “discouraged” workers coming back to the labor market.
Discouraged workers are people who want to work. But for any number of reasons, they have decided to give up on looking for a job.
Despite the fact that these folks aren’t actively looking for work, they’re getting jobs at record rates. Not only that, but the percentage of discouraged workers filling new jobs is near a record high…
More than two-thirds of new jobs are being filled by folks who aren’t actually looking. That’s higher than any level we’ve seen over the past few decades. And it means lots of workers who were previously on the sidelines are pouring into the market.
Importantly, these are folks not counted in the headline unemployment figure. Whether that’s right or wrong isn’t the point.
The point is that we’re dealing with a bigger labor market than the reported numbers suggest. If this continues, unemployment could stay low for quite a while as folks continue to pour off the sidelines into work… And it means that today’s low figure might not be the recession-predicting indicator we’d expect.
Yes, record-low unemployment usually means we’re getting close to the next recession. But it turns out, there was hidden slack in the labor market. And it tells me that the Melt Up still has room to run.
If you’re invested, that means the wise move is to stay long. And if you’re not invested, now is the time to get off the sidelines and profit from the Melt Up.
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