Figure 11-8: The unemployment trap: Unemployment and the bear market
As a substantially lagging indicator, the unemployment rate (green line), in cycle after cycle, appears most favorable (lowest/inverted) well after consumer-spending growth (black line) has peaked and the bear market (vertical yellow bars) has been under way for some time. Conversely, bear markets typically end long before the unemployment rate reaches its worst (highest) levels. Indeed, misplaced fears over the rise in the unemployment rate (a failure to recognize its lagging role) often help to fuel a selling crescendo in the stock market. Those who understand unemployment’s lagging—and therefore deceptive—nature will avoid this trap.
Current Comment: Once again, in early 2009, the bear market ended as the unemployment rate continued to worsen, only a few months before real consumer spending, as the economy’s primary engine, bottomed and began a significant recovery. It is true that the unemployment rate following the 2008-2009 economic downturn has stayed abnormally high vis-à-vis past cycles, creating economic and social dislocations. However, from the investor’s perspective, this chart proved as valuable as in all past cycles in providing the courage necessary to reinvest in the stock market in early 2009, when the economic outlook seemed most bleak.