If Unemployment Levels Remain Low, How Far Can the Stock Market Decline?

 SOURCE:

If Unemployment Levels Remain Low, How Far Can the Stock Market Decline? - Mish Talk - Global Economic Trend Analysis

Let's take a look at the 2000 stock market peak and the 2001 recession to see one possibility how the stock market may react in 2022-2023.

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Where Is the Market Headed and When?

 

On August 29, I asked Gaps Galore on the Stock Market, Where Is the Market Headed and When?

My Answer

• I think the S&P is headed to the 2400 level and the Nasdaq to the 6,000 level.
• That's roughly a 50% decline from the top on the S&P 500 and a 64% decline from the to on the Nasdaq.  

A reader commented "You're on record stating a low 1%ish max rise in unemployment. That's absolutely CRAZY! There's absolutely no way either of these indices dive down to those levels without unemployment moving above 5% and staying there for the better part of 12 months."

Recession Rise in Unemployment Rate Since 1948

During the 2001 recession, the unemployment rate only rose 1.1 percentage points. 

The percentages are recession start and end. The unemployment tends to rise after the recession ends but that was not the case in the short pandemic recession. 

• From the stock market peak in 2000 to the 2002 bottom the S&P 500 fell from 1530 (1553 if you go back a few months) to 769.
• That's a decline of 49.8% top to bottom.
• The peak was well before the recession, but many fervently believe we are not in recession yet. 

Nasdaq 100, 2001 Recession

Nasdaq 100 Recession Notes

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• Between March of 2000 and the October 2002 bottom the Nasdaq had rallies of 43.1%, 32.8%, 53.7%, 59.3%, and 22.9%. 
• Despite those rallies, two of them well over 50%, the market declined 83.5%. 
• The Nasdaq declined 56.9% before the recession even started.
• The rise in unemployment rate during the recession was only 1.1%. 

JOLTs 

The BLS report (Job Openings and Labor Turnover) JOLTs reports shows there are an unprecedented 10.7 million openings.

Employment Levels in Retirement Age Groups

In addition to 10.7 million openings, as of January 1, 2022 there were a whopping 22 million workers of retirementage who are still working. 

10.3 million of them are over the age of 65. Potentially millions of them will retire reasonably soon.

Employment Levels

Employment Level Notes

• In the DotCom 911 bust, the employment level declined by 1.1 million. 
• In the Great Recession housing bust, the employment level declined by 6.4 million
• In the Covid pandemic recession, the employment level declined by 22.3 million, and that number was dramatically understated according to the Fed.

Given 10.7 million openings and 22 million people of retirement age still working, how fast will the unemployment rate rise?

Current Numbers

• Employment: 158,290,000 
• Unemployed: 5,670,000 
• Unemployment Rate = (5,670,000 / (158,290,000 + 5,670,000)) * 100 = 3.458%

Playing With Numbers #1

• Assume a decline in employment by 5 million to 153,290,000.
• Assume a rise in unemployment by 2 million to 7,670,000. 
• Unemployment Rate = (7,670,000 / (153,290,000 + 7,670,000)) * 100 = 4.766%

That's a total rise in the unemployment rate of only 1.3 percentage points.

Playing With Numbers #2

• Assume a decline in employment by 3 million to 155,290,000.
• Assume a rise in unemployment by 1.5 million to 7,170,000.
• Unemployment Rate = (7,170,000 / (155,290,000 + 7,170,000)) * 100 = 4.441%

That's a total rise in the unemployment rate of slightly less that 1 percentage point from here. 

Pick your numbers and pick a start recession date, but that first set of numbers is fairly robust, estimating an employment decline of 5.0 million vs 6.4 million in the Great Recession. 

I highly doubt employment declines by 5 million, but if it does, the bulk of it will be by retirement. 

Five Key Ideas

1. The demand for workers coupled with retirement replacements will prevent a massive rise in the unemployment rate. 
2. Unlike the the Pandemic, the Fed will not step on the gas out of fear of stirring up more inflation.
3. Like the 2001 recession, expect many big stock market rallies that all die on the vine.
4. Given the strength in employment, the Fed has ample room to hike. I expect the Fed to overshoot, then be reluctant to act aggressively out of fear of inflation.
5. The longer the stock market and housing prices stay elevated, the more the Fed is likely to hike.