Here's how to invest when unemployment is rising:
So though many investors are concerned about unemployment releases being worse than feared, the market has historically had a bias to positive returns on these big news days, in aggregate. On average, the market’s view ends up being worse than the reality for these announcements. This is to say that the market can often predict, looking past immediate bad news, to see a future that is more favorable for investors.
. Again, in a similar pattern to the research above, rising unemployment can cause fear or even panic in the markets, but the medium-term reality is often better than forecast. They found that, all else equal a 1% rise in unemployment improved subsequent stock returns by 1.56% over the following two years. This broad trend appeared to hold in most countries, though Denmark and Japan didn’t follow the pattern.
Of course, there are still reasons for investors to be concerned. Unemployment is not the only determinant of stock returns. Valuations in the U.S. still appear high in absolute and relative terms compared with historic recessionary periods. For example, the Shiller PE as one yardstick for stock valuation is, when it’s historical long-term average is 15x-17x, and that’s for all periods, not just recessions.
Nonetheless, historically it is worth remembering that times of high unemployment have generally meant positive medium-term returns for investors, based on history. Of course, may not quite be in that position yet, given the elevated unemployment data is not yet fully in at this point. Plus, of course, this time could always be different than historical norms since aspects of this environment such as the forced shutdown of various activities globally is relatively unique. Nonetheless, quite a few studies do suggest that high unemployment rate can actually present an opportunity to buy stocks, or at least, provide a reason not to panic.
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