The 1 Market Trigger You Should Know About
- How the unemployment rate affects the stock market…
- The 6 U’s of unemployment…
- The surprising thing that makes the unemployment rate start to rise…
Dear Penny Stock Millionaire,
At first glance, the unemployment rate and the stock market might seem to have nothing in common.
But as it turns out, the U.S. unemployment rate has far-reaching ripple effects that reach every industry, including the stock market.
As a trader, it’s wise to understand the meaning of the unemployment rate and how it can affect your investments.
This post explains how the U.S. unemployment rate affects the stock market, and how you can use this information when analyzing stocks to trade.
What is the Unemployment Rate?
Unsurprisingly, the unemployment rate refers to the portion of the job force that is without a job. It’s typically referred to as a percentage.
According to Investopedia, it’s a lagging indicator, which means that it “generally rises or falls in the wake of changing economic conditions, rather than anticipating them.
When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall.”
When we refer to the unemployment rate in the U.S., we’re typically referring to what is called the U3, which is part of a monthly employment report issued by the Bureau of Labor Statistics (BLS). This is considered the key report on which the unemployment rate is based.
What Does the Unemployment Rate Actually Show?
The aforementioned U3 rate characterizes unemployed people as individuals who are available to work and who have been seeking out work within the past month.
What counts as employment? Full-time, part-time, and temporary jobs, as well as those who have at least 15 hours of unpaid family work time per week.
Alternative Unemployment Rate Reports
The BLS doesn’t just have the one way of representing the unemployment rate. They also publish other reports, including the U1, U2, U4, U5, and U6.
The U3 is the official unemployment rate report that’s generally referred to in news.
However, the other reports also have a lot of information to offer. They’re referred to as measures of labor underutilization. Here’s a brief breakdown of what’s inside the reports:
This report shows the number of people who have been unemployed for 15 weeks or more and is shown as a percentage of the labor force.
This report shows people who lost jobs, had a temporary job end and is shown as a percentage of the labor force.
This report shows not only unemployed people but discouraged workers.
Discouraged workers are the population who are available to work and have tried finding a job but have stopped actively looking.
This might be because they can’t find work or have found resistance due to being too old or young or not appropriately qualified. It could also mean those who can’t find work due to discrimination.
This report is adjusted so that the discouraged workers are included in the number of people, so it’s not just the labor force.
This report shows unemployed people and includes those who are marginally attached to the labor force.
This includes the aforementioned discouraged workers, as well as anyone who looked for a job within the past year but gave up their search.
You could call this the big daddy of unemployment rate reports. This report shows unemployed people, and also includes those who are marginally attached to the labor force, but additionally includes those who are employed part time for economic reasons.
The U6 is largely considered the most comprehensive measure the BLS has to offer.
Not only does it include all of the categories from the U5, but it also includes those who have had to settle for part-time jobs — even while desiring full-time jobs — to make ends meet.
This contingent is often called “underemployed.” But this could also include full-time workers who are working in jobs for which they are overqualified.
Unemployment Rate Over Time
The unemployment rate naturally fluctuates over time. Often, policy changes by the government can have an immense effect on the unemployment rate.
The table featured in this blog post provides a fascinating look at the unemployment rate year by year since 1929.
From the momentous unemployment rates following the Great Depression (as high as 24.9 percent unemployment in the years following) to record lows in the 1940s to the moderate rates of recent years, you can often see how the world and political climate can have an effect on unemployment rates.
How Does the Unemployment Rate Affect The Stock Market?
It might seem like there’s a divide between the stock market and the unemployment rate. After all, companies are different than people, right?
But actually, there’s a strong and direct connection between the unemployment rate and the stock market.
It works like this: The money that people make from their jobs is the key source of primary income for the majority of U.S. residents.
This means that their employment — or lack thereof — is directly responsible for how much money they have.
The amount of money that people have based on their income is the biggest contributor to how much and where they spend their cash. As you might imagine, this has a huge impact on the economy.
So, if the unemployment rate is higher, the general income (and therefore, cash to spend) will be limited. With less cash, people spend less money, and there’s less of a demand for products.
This can mean that stock prices can go down in many areas because there isn’t as much of a demand for certain goods.
For example, during low economic times, things like luxury items will pretty reliably go down in value.
When people are simply trying to survive, they don’t have money to buy jewelry or luxury cars.
Put simply, a low unemployment rate can be an indicator of economic expansion, while high unemployment can be an indicator of an underperforming economy.
But it goes beyond that.
The unemployment rate is considered an important indicator of the economy at large.
This isn’t just because of the number of people unemployed, but because of the ripple effects that it can have on the economy, the value of the dollar, and the stock market.
Something that a lot of people don’t realize is that the size of unemployment rates might have an effect on the Federal Reserve.
They might raise or lower interest rates depending on whether the economy is too hot or cold.
Hopefully this gave you a general understanding of the relationship between unemployment rate and the stock market.
Tomorrow, let’s look closer at the differences between a low unemployment rate and a high unemployment rate.
We’ll also look at the different unemployment categories and what these mean for you as a trader.