Friday, 8 January 2016

Cycle-Low Unemployment Rate & Declining Stock Market Prices - A Bust Must Be Near

The stock market (Wilshire 5000) peaked about seven months ago while the unemployment* rate is now the lowest during this cycle and the lowest since May 2008.

This is not good news for future stock market returns as the two are related. In fact, the higher the stock market and the lower the unemployment rate, the worse future stock market returns are likely to be. This relationship is evident in the below chart which shows the ratio between the stock market and the unemployment rate and compares this ratio with y/y stock market returns.

If the past is any guide, the current record high stock market to unemployment ratio (which is even higher than in 2000 and 2007) signals a bust must be near and that the 5.2% YTD decline in stock prices is just the very beginning.

*Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons


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