Quick take- The employment rate and equities correlation

Varun Navale
Sep 7, 2018 · 2 min read

“ A record-long bout of hiring has driven the U.S. unemployment rate down to 3.8 percent, the lowest level since April 2000. So how much lower can it go? Judging from the latest jobs data, it might finally be nearing the limit.”- Bloomberg

Marketwatch, MotelyFool, Wall Street Journal, and several other financial news sources citing low unemployment as a sign of a strong economy.

Yes, low unemployment does prove a strong present economy. The DJI and SPX moving averages are the most vertical they have been in a decade. But what does the future hold?

Looking at the juxtaposition of the DJI and unemployment rate ticks shows a staggered correlation (highlighted in yellow) between the two from 2000 onward.

Every reversal of unemployment rate trend has resulted in a change in trend for DJI. A similar pattern is also seen in SP500.

Higher the intensity of the unemployment trend, the deeper the reversal tends to push.

If this holds for the current trend, a reversal in unemployment rate could well mean a strong reversal of the current bull market in the equities markets.

A break of unemployment rates above the green trend line could potentially indicate a high probability of the onset of a bear market, leading to what could potentially be a big correction (recession?) beginning mid 2019-mid 2020.

Interesting times! See the financial storm brewing?


Varun Navale

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