Unemployment on the Rise: Watch Out Below
By Ian Davis
Rising U.S. unemployment is dominating the headlines...
If you missed the story, here's the short version: On Friday, the U.S. Department of Labor came out with its latest unemployment figures, and they weren't pretty. The report showed a 0.3% rise in the unemployment rate, from 4.7% to 5%.
This is the highest level of unemployment in the U.S. since 2005. However, the absolute level of unemployment doesn't concern me as much as the direction and magnitude of the change.
You see, when unemployment is very high, it's a sign of a weak economy... However, if the unemployment number is no longer rising – like in the early 1980s – the damage to the stock market has already taken place and good buying opportunities arise.
Conversely, when unemployment is very low, like it is today, it is the sign of a strong economy. The problem with strong economies is that they tend to overheat. Eventually, they return to normal rates of production. This is usually accompanied by a correction in the stock market.
Even though 2005 was the last time unemployment was above 5%, back then, it was on the way down and the market posted nice returns.
September 2001 – halfway through the dot-com correction – was the last time unemployment was above 5% and rising, like today.
The following chart shows the U.S. unemployment rate since 1964 versus the S&P. As you can see, lows in the unemployment rate always correspond with market tops.
Low, Rising Unemployment Signals Market Peaks 
The S&P returned 10.2% annualized during periods of falling unemployment and a measly 2.9% annualized during periods of rising unemployment.
Conclusion
Rising unemployment – such as we're seeing today – usually signals rough times ahead for the stock market, especially when it's rising from very low levels. However, even during rough times in the market, plenty of opportunities exist for savvy investors.
Good investing,
Ian Davis