Unemployment is very low; what does that mean for the economy and stock prices?

May 16, 2018

 

The official unemployment rate last month fell below 4% for the first time in 17 years.  The US has added jobs for 91 consecutive months now, the longest stretch of all time. Our economy’s expansion at 107 months only trails the 1990s in length.  Times are good, but what does that mean for the future of the economy and stock prices?

 

Unemployment has been below 4% only a few times in the last seventy years according to the Wall Street Journal.  Those times were during the Korean War in the early 1950s, the Vietnam War in the late 1960s and early 1970s, and during the tech boom of the late 1990s/early 2000.  The Journal points out, however, that each of those periods was associated with growing inflation (50s, 60s, 70s) or the financial excesses of the technology and internet boom (90s). Statisticians would point out that a sample size of three is not conclusive in any way.

 

Today’s economic environment does not display similar characteristics.  Inflation is fairly low; stock prices are high, but not nearly as excessive as in the 1990s.  Wage inflation was prevalent in the 60s and 70s as was overall inflation-exacerbated by the two oil embargoes of that decade.

 

Stock market results immediately after the three periods mentioned above were muted to say the least.  Certainly, most investors remember the post-9/11 bear market and some will recall the bear market of 1973-1974. But to compare the economy years ago to today’s environment is also challenging.  Wages have barely kept up with inflation despite our full employment statistics.  Normally one would expect a shortage of workers to drive up wages precipitously.  That doesn’t appear to be happening yet.

 

Uncertainty is often a precursor to economic contraction and decreasing stock prices.  Recent uncertainties in trade, tax and fiscal policies appear to not be enough to derail the economy or stock and bond prices.  Although interest rates have risen slightly they are still significantly below historical norms.

 

What’s an investor to do?  A globally diversified balanced portfolio will often soften the blow of eventual downturns in stock and/or bond prices.  The economy and stock prices will continue to oscillate-they always do.  Prepared disciplined investors have taken these factors into account in building their portfolios for a long-term horizon. 

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