From Investment Road Sign™ to Reality: Understanding the Implications of Unemployment Data
In our 2024 Mid-Year Investment Outlook from July 19th, we last updated you on what our proprietary risk management system was telling us and how it would guide our overall investment strategy as we advance.
Most notably, we included the Unemployment Road Sign as a current risk. Our main reasoning at the time was that the overall civilian unemployment rate had just reached 4.1%, surpassing pre-COVID levels.
In light of the recent job report released on Friday, August 2, 2024, which resulted in turbulence in the stock markets, we would like to provide additional insight into why we believe the existence of this road sign contributes to increased overall risk in the capital markets.
Historically, whenever the unemployment rate has increased by +0.6% from the lowest point of the business cycle (as seen in the green box in the chart below), it has usually indicated a recession. With Friday’s unemployment rate at 4.3%, it is now +0.9% higher than the lowest point of the cycle.
The chart below also illustrates this point, with red dots representing the point at which the unemployment rate first reached 0.6% above the cycle low, and recessionary periods represented by the grey vertical bars. These unemployment increases of +0.6% from the cycle lows have preceded or coincided with each of the last twelve recessions, with only one false signal in 1959.
It is important to note that the unemployment rate is not considered a leading economic indicator for the U.S. economy. Therefore, it is not an accurate timing tool for recessions when viewed in isolation. However, we believe it does provide valuable insights when considered alongside our other Investment Road Signs™ for indicating an increase in risk across capital markets.
Please contact us with any questions regarding this information as it relates to how we are currently managing your portfolio.
Robert Amato, CFP®, CIMA®
Principal
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Compass Wealth Management is a Registered Investment Advisor. Advisory services are only offered to clients or prospective clients where Compass Wealth Management and its representatives are properly licensed or exempt from licensure. This article is solely for informational purposes and is not intended to be relied on as a forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Compass Wealth Management to be reliable, are not necessarily all-inclusive, and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investments involve risks.