The best research that we could identify on how unemployment rates have historically impacted stock market returns was a paper titled “The Reaction of Stock Market Returns to Unemployment” by Taamouti and Gonzalo. The main takeaway of their research is: “For the quantile range (0.35, 0.80), an increase in the anticipated unemployment rate leads to an increase in stock market prices.” Outside of the 35th to 80th percentile range, the authors found no statistically significant relationship between unemployment rates and stock market returns.
While this may be counterintuitive, we believe that it may be due to central bank activities to support asset prices. In the authors’ words: “When the unemployment rate is high, the Fed decreases the interest rate, which in turn increases the stock market prices.” Whatever the cause, it is important to remember that in extreme cases (below the 35th percentile or above the 80th percentile), there does not seem to be any reliable relationship between unemployment and stock prices when unemployment is at extreme levels. Keep this in mind the next time a commentator states that high unemployment will cause another bear market in the near-term.
