Thursday, November 12, 2009

Unemployment and stock prices

I normally have a live and let live attitude toward other people's market analysis. Once in a while, I come across research that seem so misguided that I feel compelled to speak up.

A blogger recently posted an intriguing bit of analysis on a discussion group that I subscribe to and it was entitled 10% Unemployment: A Remarkable Signal for Stocks. He shows the chart below and concluded that “[h]istorically the stock market has performed exceptionally well after unemployment has peaked.”

How do you know unemployment has peaked?
That’s interesting analysis, but how do you know that unemployment has peaked? The latest NFP figures don't seem to be pointing toward any peak in unemployment. By contrast, David Rosenberg of Gluskin Sheff believes that U.S. unemployment is going to see 12-13% before this is all over [emphasis mine]:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market

Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

Buyer beware
This is a lesson for individual investors of buyer beware. This analysis sounds like generic boosterism for the stock market. While I understand that investment advisors may have their own agenda in promoting a certain viewpoint, experienced advisors know that success comes from serving their clients’ long-term interests.

Investors and analysts need to learn to thimk!


Andy Dong said...


Good post. Great to see different point of views whether right or wrong.

The market rally is largely driven by liquidity and seemingly ever declining dollar.

Nothing goes in one direction forever. A snapback in US dollar during Sep08 - Mar09 saw a detrimental implication for hard assets like stocks and commodity.

My question is what do you see as an imminent risk for a snap back in US dollar hence correction in stocks or commodity.

- Swine Flu breakout in China during winter
- second wave of Option-ARM and Alt-A mortgage reset in 2010.
- Chinese overcapacity in industrial production
- increase in US interest rate (is this even possible under helicopter Ben? Perhaps remotely possible)


Unknown said...


Thank you for referencing my article on your blog and seeking alpha. I enjoyed reading your position regarding my article and I look forward to reading your future posts. Throughout your article you make solid arguments and I completely agree with the conclusion that for investment advisors, “success comes from serving their clients’ long-term interests.” However I believe you may have misinterpreted the premise of my article.

By no means did I want to allude that unemployment has peaked, in fact I believe that it can continue to rise well into the early parts of 2010. I was simply attempting to show how the stock market has behaved historically when unemployment has peaked. Financial markets have been following economic cycles for over 150 years and are linked in a logical, rational and sequential relationship to business activity. Given the current economic environment and unemployment levels I thought that people might find this comparison interesting as well as educational.

To view my previous posts or to obtain more information about my viewpoints of the financial markets please visit


Jim Kopas
Pring Turner Capital Group