Bottom-Fishing With Employment Data

Unemployment numbers have a prominent position in the financial news, but many investors and commentators take an oversimplified view of what they mean. All too often, a discussion of unemployment announcements is dismissed with the statement: "Unemployment is a lagging indicator," an attitude that let many to overlook valuable information. If you ignore employment data in making strategic timing and allocation decisions, you may be leaving money on the table.

Market bottoms generally precede the end of recessions by several months. The table below highlights any market closing low as a bottom if it is not exceeded to the downside within three months. By this definition, three recessions have contained two bottoms each.

Three Recessions With Two Bottoms Each Dow Jones Indices

Investors always want to "get in at the bottom." However, making big portfolio changes to try to catch the bottom can lead to costly false starts. So if you are bottom-fishing, it is usually wise to start slowly with smaller portfolio additions (stocks) and build as the economy improves.

Following some employment indicators can give reinforcing signals; for example, the weekly manufacturing hours worked (reported monthly) and the weekly initial unemployment claims (following the four-week average reported every week). These are also two of the earliest employment reports to indicate the end of a recession.

Using the earliest of the employment signals related to the end of recessions since 1945, the investment results shown in the following table would have been obtained investing in a portfolio the same as the Dow Jones Industrial Average without dividends .

Employment Signals of Recession Bottoms U.S. Department of Labor and Dow Jones