Unemployment and Future Stock Returns

“Be greedy when others are fearful” is one the old adages of investing, and the numbers appear to back that up, at least going by the unemployment rate. I went through the historical data and took the current employment rate going back to 1956 (black line, left scale) and compared with the future 10-year real returns of the stock market (blue line, right scale). So that includes both dividends and inflation.

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The lines seem to line up fairly well. Let me caution you that it’s dangerous to read too much into charts like this. Instead, investors should understand the broad lesson that it’s usually a good time to invest when the economy is flat on its back. Conversely, when the economy is roaring along, that’s often a sign of trouble for stocks. In fact, one of the better estimates of the real cost of equity capital just might be the current employment rate.

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Posted by on June 19th, 2014 at 11:29 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.