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Is 10% Unemployment Good for Stocks?

Last Friday's employment report from the US Bureau of Labor Statistics showed that the unemployment rate is now at 10.2%, its first foray above 10% and its highest level since 1983. Despite the seemingly bad news, the stock market has climbed even higher.

In the past 50 years, unemployment has gone above 10% only once before, for the 10 months from September 1982 through June 1983. In May 1979, unemployment was at a low of 5.6%. The economy was hit by two recessions in the early 1980's and unemployment rose for 3.5 years before peaking at 10.8% in December 1982 (see chart - recessions marked by grey bands).

Now, 32 months since unemployment hit a low of 4.4%, we are back over 10%. What lessons, if any, can we get from what happened to the markets when unemployment soared back in the 1980's? For the 50 months from the 1979 unemployment low until the last time unemployment was above 10% in June 1983, the Dow and S&P managed to gain a compound annual rate of 9% and 13% respectively. By comparison, in the 10 months from the first time unemployment hit 10% until it crossed back below, the Dow and S&P gained a whopping 36% and 41% respectively (annual rates of 44% and 51%). Unemployment is a lagging indicator so even though the rate increased, the economy was already recovering and stocks gained. Not surprisingly, some of the biggest gainers over the period were consumer discretionary stocks.

Biggest S&P gainers between 8/31/1982 and 6/30/1983 included:

  • Pulte Homes up 433%
  • Limited Brands up 320%
  • Family Dollar Stores up 249%
  • Hasbro up 228%
  • Gap up 222%

Another factor that could help the markets is the weaker dollar. "The dollar going down and unemployment being high in general is not bad for the stock market. You have to understand that the stock market isn't the economy," said Michael Cohn, chief investment strategist at Atlantis Asset Management. If companies are cutting their payrolls and benefiting from currency-exchange rates, it "means they're more profitable."

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