As I am sure you know, the stock market in 2022 has had a terrible year. As of October 10th, it is down 24% for the year. Could the bottom be near, and the markets go higher from here?
The Federal Reserve has been raising interest rates to fight inflation. Rising interest rates make business and personal loans more expensive which slows down the economy. With a slower economy, inflation should be lower.
In a full economic cycle, growth slows down as loans get more expensive. This slowing leads to some businesses struggling and needing to lay off workers. In the current cycle, businesses have yet to lay off workers. In fact, they are still hiring more employees.
On Friday, October 7th, the September jobs report was released, and 263,000 new jobs were created. Increasing jobs means the economy is still running well. Unemployment decreased to 3.5%.
According to JP Morgan’s research in their Guide to the Markets, unemployment increases before the market hits a bottom. This can be seen in the following charts of market bottoms. The unemployment rate is the purple line, and the market bottom is the black, vertical line. In each case, the unemployment rate (purple) was increasing before the market bottomed.
The current 3.5% unemployment rate is low and has remained low these past several months, even with the Federal Reserve quickly raising interest rates. There is no sign of increasing unemployment at the current time. The next graph shows the unemployment rate as a grey line with the current rate circled in green.
As the Federal Reserve continues raising interest rates, the economy will eventually slow, and workers will be laid off. Until that slowing happens, watching the unemployment rate should give us a hint for when the stock market is approaching its bottom.
If the unemployment signal holds during this downturn, as it did in the previous economic downturns, then we are still months away from a market bottom.