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Unemployment Rate and Stock Market Returns

| | Posted in: Economic Indicators, Equity Premium

Financial media and expert commentators often cite the U.S. unemployment rate as an indicator of economic and stock market health, generally interpreting a jump (drop) in the unemployment rate as bad (good) for stocks. Conversely, investors may interpret a falling unemployment rate as a trigger for increases in the Federal Reserve target interest rate (and adverse stock market reactions). Is this variable in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using monthly seasonally adjusted unemployment rate from the U.S. Bureau of Labor Statistics (BLS) and monthly S&P 500 Index levels during January 1948 (limited by unemployment rate data) through February 2020, we find that:

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