Unemployment Rates

What the labor market means for the stock market

I know everyone hates inflation and I understand why that is.

But it feels like people who are down economically because inflation is so high are missing out on the fact that the job market is on fire.

The unemployment rate is essentially back to pre-pandemic levels:

But Ben is it just because no one wants to work anymore? Have you ever heard of the Great Resignation?

It’s true that we have never seen so many people leave their jobs:

However, this is a good thing. It means that people have confidence that they will find another job.

The big resignation is to hire a PR agent. It should be renamed the Great Redesign.

The number of prime-age workers (25 to 54) has just reached a new all-time high, surpassing pre-pandemic levels:

No, it’s not a typo or a graphic crime. You can see the labor force participation among this group1 is also approaching pre-pandemic levels:

I know this goes against the prevailing narrative right now, but most people want or need to work.

Well, what about all the old people who retired early?

It’s true that millions of people have retired earlier than expected, but the labor force of the 55+ cohort is also almost back to 2019 levels:

The participation rate of people aged 55 and over has not yet recovered, but it is on the rise again and not too far off:

This table of Bill McBride showing the current recovery in employment compared to previous post-war recessions is something else:

We just added 1.7 million new jobs in the first 3 months of the year alone.

It’s great Ben but what about salaries?

Fair point. Many workers see their wages increase, but not as fast as the rate of inflation. It’s not great.

Surprisingly, people in the lowest wage group experience the highest wage growth. Just look at this table of Ben Casselman:

Talmon Smith of the New York Times wrote an article this week about Nebraska, the state with the lowest unemployment rate in the country:

Nebraska’s unemployment rate was 2.1% in February, tied with Utah for the lowest in the country and near the lowest on record for any state. In several counties, unemployment is below 1%. Even accounting for adults who have left the workforce, Nebraska’s share of the population 16 and older is about 68%, the highest figure in the country.

This story of a bartender who changes jobs because she gets better offers says a lot about who has the upper hand right now:

This included the early-night shift bartender, Nikki Paulk, an easy-going woman with a flash of pink hair. “I’m in high demand, babe,” she said, mentioning “desperate” employers with a bright smile. “I’ve worked in six bars in the last six months because I keep getting better offers that I can’t refuse.”

Beyond inflation and employers struggling to recruit staff, this all seems like a wonderful development. Workers finally have bargaining power.

The only other potential downside I see here is that there probably isn’t much more room for improvement from here. It’s like we’re rolling the tube to try and squeeze that list out for a bit of toothpaste before moving on to a new tube.

The lowest unemployment rate ever in modern economic times was 2.5% in the early 1950s:

You can also see from this graph that low unemployment rates are usually followed by a recession. Not all recessions start with low levels of unemployment, but it does, considering that recessions tend to stem from excess in the economy.

I have looked at the relationship between the unemployment rate and the stock market in the past. Average forward yields are higher when the unemployment rate is high and lower when the unemployment rate is low.

It also makes sense since unemployment is higher during a recession, which is also when the worst bear markets take place.

Buying when the stock market crashes is a pretty good long-term strategy.

Let’s look at it another way. Going back to 1948, I looked at the worst results for the S&P 5002 different ranges of unemployment rates:

Again, this is a worst-case scenario, so it’s not the base case, but you can see a clear relationship in the data here.

The potential for poor stock market performance is greater when the unemployment rate is low. Investing when unemployment is high is actually much safer.

I’m not saying that means a recession is imminent.

Recessions are easy to predict, except for timing, depth and duration.

With such strong labor markets, this recovery may continue for a few more years. Who knows?

And even if we do enter a recession in the months or years to come, there’s no way of knowing how the stock market will react.

What I mean is that sometimes markets and economics are counter-intuitive.

Good and bad times never last forever.

Further reading:
How to prepare for a recession

1The growth of this graph since the 1950s is also insane.

2These are total returns, including dividends, using monthly returns.