U.S. Stocks and Unemployment

U.S. economy continues to grow for more than a decade after the great recession. Current U.S. economic expansion is the longest one in modern U.S. history. Moreover, the unemployment level fell to the lowest level in more than 50 years. Nevertheless, the low unemployment level creates a medium-term risk for U.S. stocks.

It is an interesting fact that unemployment continues to fall, but the question is for how long it will fall in the future. As history suggests, unemployment is much more likely to fall than rising in 2020 or the following years.

Moreover, unemployment is directly related to recessions and the weak stock market.

However, it will be hard to sustain the low unemployment level in the long run. The lowest level dates to 1953 when the number of unemployed people fell to 2.5%. It is right that current unemployment may continue to decline and even fall below 2.5%.

For example, in Europe, there is only one country, the Czech Republic which has an unemployment rate below 3%. It means that the U.S. is getting close to the low-end of the unemployment range. Additionally, once at these levels, there are two options; the first one is that it will remain at the same level. The second option is less pleasurable as unemployment may rise.

Stocks and labor market

The problem is when unemployment starts to rise; this would affect the stock markets. Moreover, rising unemployment is one of the signs of a recession. Thus, if unemployment does rise, stock markets will suffer due to this factor.

As a result, the current unemployment level creates a medium-term risk for the stock market. Unemployment may fall below 2.5% but it may signal the beginning of the problems. The chance that unemployment will continue to fall for more than a couple of years is highly unlikely based on history. In the end, this is not good news for the stocks. This may not happen in 2020 but sustaining this level is unlikely in the long run.