Unemployment Rate and the Stock Market

Unemployment Rate and the Stock Market

When it comes to measuring the health of a country, investors will look at the GDP and the unemployment rate. Since 2008 Subprime mortgage crisis, we saw the unemployment rate for the US shot up to double digit growth for the first time since the Great Depression. GDP was negative and the stock market crashed 50%!

As Ben Bernake and Janet Yellen, both the former chairperson of the US Fed was focusing on the unemployment figure, they lowered the interest rate drastically to save the economy. In addition, we also saw the US Fed launched quantitative easing (QE), ultimately buying trillions of dollars of government bonds and mortgage-backed securities. Between 2008 and 2015, the Fed's balance sheet, its total assets, ballooned from $900 billion to $4.5 trillion. 

This round, during the pandemic Covid-19, before we saw the unemployment rate increase, the US Fed had even more drastic move, by end of March 2020, the Federal Reserve balance sheet was at $5.3 trillion, up 12.4% over the last week of March. The central bank was greatly increasing the amount of Treasurys and other assets it owns in an effort to keep markets and the economy afloat during the financial crisis.

With the "experience" of the 2008 recession, the Fed offered forward guidance on the future path of its key interest rate, saying that rates will remain low "until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals." 

Let's take a look at the US Dow Jones Industrial Average chart:

 The above chart is a comparison of the different recession events with respect to their duration to reach bottom in the stock market. The 2000 Dotcom bubble from peak to bottom took almost 3 years. While the 2008 financial crisis took half the time of Dotcom to reach bottom. However, if you were to look at the steepness of the chart, the duration of the 2008 financial crisis was shorter and the graph is steeper. The price drop was more drastic than the Dotcom as well. Hence, this gives us some idea what will be the outcome of the current Covid 19 recession. Firstly, in terms of steepness, the current one is the steepest by far as we witness the DJIA had 3 times triggered the limit down circuit breaker. However, in terms of duration, it would be too premature to conclude that the crash was over as based on the previous 2 events, the duration seemed more than 12 months. 

Nevertheless, this round we see governments around the world are employing massive fiscal and monetary policy measures to save their economies and the stock markets. For example, in the US, the Fed had announced that it will buy unlimited treasury securities and government guaranteed mortgage backed securities to shore up the liquidity in its financial system. These efforts have pushed the US stock market to the recent high with S&P 500 almost nearing the 3000 level (the peak was 3400 level). 

The recent unemployment rate of 14.7% is just the beginning. There will be more weak economic data releasing globally. The financial markets operate in a big ecosystem of retail investors, fund managers, financial institutions and government agencies. How these market players interpret the market news will in turn affect the sentiments of the markets, which will determine the next direction of the markets.

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