Find out how. Let's Talk

How the Market Works

Hi, I’m Full Employment: How the Market Works

Posted by kdadmin on December 8th, 2016.

Hi, I’m Full Employment: How the Market Works

This morning, iTunes informed me that my “most played song of the last 30 days” was “Wollt Ihr Das Bett in Flammen Sehen.” Which, apparently, translates to, “You want to see the bed in flames.”

Why yes, yes I do… I totally thought I was singing about something else. My German pronunciation is far better than my comprehension. My other favorite song of the month turned out to be about “dark fairies stealing children’s tears at night.” Um … Maybe, I’ll go back to learningFrench for a bit.

Speaking of language,what do you think the language of Economics is trying to tell youin the chart above?

“Hi, I’m Full Employment”

Theorange line is SPY (an ETF representing the S&P 500 index). The blue line is the US unemployment rate. Low unemployment rates mean we’re getting closer to theoretical full employment, which I’ve noted with thedotted black line. Full employment is usually right around 4.7% unemployment. We’re at 4.6%now.

Notice anything? What happened to the stock market the last two times the US economy hit full employment over the last 22 years?It tanked. I’ve connected the dots with my vertical red lines. For, “Danger, Will Robinson!” Notice where we’re at now? Uh oh.

Kind of eerie how that works, isn’t it? It gets better.

The “R” Word

Look at the grey bars above. What do you think THEY indicate?
Recession.

I’m not kidding. Was it immediate? No. In each case, it took about a year or two to hit recession. But if you remember the last recessions, how long did it take for the economists to admit that we were in a recession? About six to nine months. How much had people lost by then? A lot. Well, some people. We were almost entirely out of the way of that. I’ll give you one guess as to which investment we used to avoid that nightmare. For the answer, check out my article, Investing at the Top of the Market: How the Market Works.

It’s in times of belligerent market euphoria that people seem to forget that it’s called a market cycle for a reason.

Recession? No Way! Way.

Don’t want to believe me? Have a look at the chart above. It shows every recession since 1970 (grey bars). (It’s the same all the way back to in 1948). Notice where the unemployment rate was right before every recession? At its lowest rate, or full employment, for the cycle. I connected the dots in red again for you.

We’re at full employment again today. So, what does this tell you?

Hopefully:

  1. It tells you why I’m not buying stocks in spite of the current market euphoria.
  2. It deters you from playing amateur investor in a ruthless market.
  3. It reminds you about Investing at the Top of the Market: How the Market Works.
  4. If you’re a business owner, who depends on discretionary spending (travel, jewelry, expensive cars, clothes, remodeling or major construction), or recession sensitive business clients, it gives you some lead time to tighten your belt to weather the storm.
  5. It makes you think about sell prices for stock you stubbornly own. Will you lock in gains or keep trying to shoot the moon? If stocks DO plummet before you can lock in gains, WHEN will you sell to prevent further losses? How will you avoid riding a stock all the way to the bottom?

To be clear, I don’t see a recession happening tomorrow. But macro economic indicators certainly don’t point to record economic growth either, at least not for stock prices. In fact, nearly all signals point to a market top plateau. So, contraction and recession are next in line.

The Next Steps?

Again, do nothing with stocks. Sit on your hands if you have to.

Think about what you would have done differently during the financial crisis of 2008-2009, if you had to do it all over again. Try to figure out how you can be sure to make better choices this time around.

Read my next article about WHY the unemployment rate and recessions are linked, and how it could affect your other assets, like real estate.

Or, reach out to me and we’ll talk about it.

Meet

Minneapolis, MN | St. Croix, USVI
(763) 577-1900