If the unemployment rate was a stock, I’d be buying it right now.
The current unemployment rate is 4.3%. That’s low by historical standards. But, it’s much higher than the 3.2% level at which unemployment bottomed early last year. And, if history is any sort of a guide, the unemployment rate could be much higher in the months ahead.
Take a look at this long-term, monthly chart of the unemployment rate…
The red arrows on the chart point to the three times this century the unemployment rate shifted from a downtrend to an uptrend. We’re ignoring the COVID-inspired shift in 2020 since it was not caused solely by economic issues.
It’s worth noting that the two prior trend shifts in 2000 and 2007 occurred just as the Fed started lowering interest rates. They also occurred just prior to massive declines in the broad stock market.
Of course, I’m not implying that the Fed’s decision to cut interest rates caused the unemployment rate to rise, and crashed the stock market. Rather, it’s more likely the Fed saw an economic shift coming in 2000 and 2007. So, it lowered interest rates in order to lessen the damage.
Looking at this chart of the unemployment rate – which is clearly accelerating higher – it’s quite possible the Fed is seeing a similar economic shift developing right now.
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Keep in mind, the S&P 500 was trading near an all-time high in March 2000 when the Fed started cutting rates. The stock market lost 40% of its value over the next two years.
The S&P 500 was at an all-time high in September 2007 when the Fed started cutting interest rates. The index lost more than 50% over the next 18 months.
And now, with the Fed signaling it’s going to cut rates following its next meeting (September 18), the S&P 500 is trading near an all-time high.
I don’t see this as a reason to be bullish.
Best regards and good trading,
Jeff Clark
Editor, Market Minute