Historic Unemployment Numbers Should Encourage Investors to Take More Risk
The Leuthold Group’s Chief Investment Strategist, James Paulsen, believes that historic unemployment numbers should encourage investors to take more risk, according to Markets Insider.
The June jobs report showed a 4.8 million increase in nonfarm payrolls. Furthermore, the unemployment rate decreased from 13.3 percent in May to 11.1 percent in June. The unemployment rate has been decreasing since it peaked at 14.7 percent earlier in the pandemic.
Paulsen argues that history shows that market gains follow high periods of unemployment. In every unemployment rate spike since 1948, the S&P 500 outperformed. The index posted average annual returns of 18.7 percent when the unemployment rate was above 6.8 percent. Furthermore, when the unemployment rate was above 8 percent, the S&P 500 posted an average 25 percent annual return.
Paulsen believes the correlation is simple and that high unemployment rates lead to “the outsized potential that future economic conditions are destined to improve."
However, many experts don’t agree with Paulsen and believe that the recent stock market rebound has underestimated the likelihood of a resurgence. Paulsen defends his claims by citing the recessions of 1982 and 2009. These past recessions all had high unemployment numbers, but "possessed the uncommon opportunity for outsized economic improvement."
"Investors should be appreciating how much room there is for 'improvement' in the coming years, how policy officials are aggressively attempting to bring better times, and how the stock market, in these conditions, typically does fantastic!" Paulsen said.