Last week, the Department of Labor announced that 196,000 people filed for unemployment insurance. While unfortunate for those people, it was the lowest weekly number since the late 1960’s. This is a positive sign for the economic cycle and for investors. At the peak of the financial crisis, the weekly number of people filing for unemployment insurance was 650,000.
Weekly jobless claims data is one component of our Business Cycle Indicator (BCI). It is designed to anticipate when a recession is likely to occur. When jobless claims are falling, it is a good sign for the economy. The last time unemployment claims fell to this level was 1969.
Why it is Good for Investors
When the economy is expanding, the stock market typically does extremely well – averaging more than 16% per year. On the other hand, when the economy experiences a recession, the stock market declines 8.4% per year. Below is a chart that shows these historical returns of the S&P 500 based on whether or not BCI was warning of a recession.
The current bull market started back in March of 2009, and could potentially continue to run for a couple more years. However eventually, every cycle does come to an end. When it does, the stock market typically gives back a good chunk of the gains it produced during the previous expansion. The chart below shows the S&P 500 from 1968 to present, and the steep declines that occur during recessions.
Investors who have remained invested have been rewarded over this extremely long economic cycle. The next 10 years will probably not be as favorable as the last ten. However, our Business Cycle Indicator should provide investors a means of measuring recession risks, and ultimately make more educated investing decisions.