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Many investors have understandably experienced some cognitive dissonance as they watched stocks climb starting in late March, all while truly sobering unemployment numbers were registered week after week. According to the US Bureau of Labor Statistics data, the unemployment rate rocketed from 4.5% in March to 14.7% in April. Meanwhile, global stocks as measured by the MSCI World Index surged 10.9% in April. 

In May, the unemployment rate declined slightly to 13.3% but remained historically high -- yet stocks continued rising. Though it can be troubling to watch stocks rise amid widespread unemployment, this is common early in bull markets. 

Stocks usually rise in anticipation of better days ahead before other economic indicators, such as unemployment, improve. Waiting to invest or re-invest in stocks until the dust settles and unemployment recovers can be extremely costly, as it could mean missing out on strong returns typical in an early bull market.

Acknowledging unemployment as a less-helpful stock market indicator in no way diminishes its real human costs. Unemployment figures aren’t merely statistics but represent a painful and deeply personal loss of income for many individuals and families. 

Additionally, the speed and magnitude of recent job losses are exceptional. April’s 10.3 percentage-point spike in the unemployment rate is the largest single-month increase on record. According to the Bureau of Labor Statistics, the previous biggest monthly increase since 1948 was 1.3 percentage points in December 1949. For those who lost their job or have an out-of-work family member or partner, this is likely a difficult and scary time.

We do not, however, believe unemployment even of this scale will hold back the stock market. The main reason is, unemployment is a lagging indicator, a record of what has happened recently, but not necessarily a sign of what will happen in the future. Unemployment tends not to improve until an economic recovery is already well underway. By contrast, stocks are typically a leading indicator. As such, what happens in the job market shouldn’t guide your stock market outlook.

Employment Numbers Offer a Backward Look

Employment numbers report layoffs and hiring that have already happened. So, even new unemployment figures are telling us about events that are already in the past. In this way, unemployment numbers give you a look into the economy’s rearview mirror. This information is often valuable for helping confirm what has happened recently, but it doesn’t tell you what will happen next. 

Stock markets, by contrast, are always looking forward -- rising and falling based on investors’ expectations for the future. Thus, investing based on employment figures alone would be like driving while only using the rearview mirror. Despite this, investors often worry high unemployment will impact stocks.

History, however, shows most bull markets and economic expansions begin as “jobless recoveries,” in which the stock market and economy begin improving before hiring accelerates. While this may seem odd, it is normal. Most recoveries have begun while the unemployment rate is still high. 

Then, as businesses eventually regain their footing and become more optimistic about the future, they usually become more willing to invest and expand -- including ramping up hiring. For instance, in the past economic recession, the bear market ended on March 9, 2009. The National Bureau of Economic Research noted the economy began expanding in July of 2009. But the unemployment rate didn’t peak until October of that year.

Through April and May this year, stock markets posted significant gains -- sometimes even rising sharply on the very day a new jobless claims report was released. It’s not that big job losses are bullish, but rather that markets can rise even in the face of worsening unemployment for several reasons. First, markets are aware of expected economic conditions and anticipate job losses before official reports are released. 

Events or outcomes already priced into the market lose their surprise power if reality largely matches expectations. Second, a belief that business prospects will improve over the next year can boost stock prices months before the labor market begins recovering. Also, many of the current job losses may prove temporary. If businesses can resume more activity soon, jobs could bounce back relatively quickly.

Widespread unemployment is trying and painful. But it doesn’t usually spell trouble for stock markets. While we can’t know for certain whether stocks’ rise since March is the start of a new bull market or not, stocks historically start recovering before other aspects of the economy -- particularly employment. 

It can be difficult to reconcile a rising stock market with the economic pain individuals and families are experiencing right now. We’re certainly not here to tell you there aren’t problems and challenges ahead. However, employment data are backward-looking and stocks are already likely looking ahead towards a better-than-expected future.

For long-term investors who need portfolio growth, the biggest risk now might be not being invested in the stock market. High unemployment on its own just isn’t a good reason to be out of stocks. The stock market tends to move ahead of and rebound before the economy and labor market. Waiting to invest or re-invest until unemployment starts to recover could mean missing out on significant returns and jeopardizing your chances of reaching your long-term financial goals.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis, or reconsideration. Also, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.