A monthly brief of new insights on important economic, financial and policy issues. How long can stock prices advance, and how high will they go? Is the bull market in stocks an early cycle phenomenon that gives way as an economic expansion takes hold and unemployment falls? More specifically, is there a trade-off between the benefits of higher stock prices and the benefits of higher employment in the economy as a whole?

To start with the latter questions, after a long rise during most of the post-World War II period through the early s, U.

In fact, since the late s, stocks rise as unemployment falls. Correspondingly, stock prices fall as unemployment rises.

U.S. Unemployment Rate Forecast

Indeed, stock prices and the unemployment rate have moved in tandem over the past 15 years. See Chart 2 What is most surprising is that changes in the direction of the unemployment rate occur pretty much at the same time as changes in the direction of stock prices or, in the case of the financial crisis, the rise in unemployment actually led the fall in stock prices.

This may be true in terms of output and incomes, but apparently not in terms of stock prices.

It may well be that stock prices have their own forward momentum, just as most business decisions do, and fail to adjust quickly to changes in economic direction. Investors and employers seem to change their minds about future economic conditions at about the same time. The tide goes in and the tide goes out during the economic cycle for both investors and workers.

The first question — can we say anything about the future level of stock prices from this relationship — is far trickier. Assuming that the unemployment rate continues to fall however slowly over the next several years, we can say with a high degree of confidence that stock prices should stay at or above their current levels for the foreseeable future.

Unfortunately, any statistical relationship between the actual level of stock prices and the unemployment rate is not very predictive.

If it were, there would be many more stock market strategists and many fewer academic economists. Clients of The GailFosler Group gain access to a network of world class business, policy and academic experts. Find out how your company can benefit from working with us. Username or Email Address.

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