Emplolyment and the Stock Market

Interesting article;

Is the stock market crazy?
No doubt there are more than enough reasons to have it committed to the insane asylum. But I'm not sure that Monday's behavior was one of them.
Over the last six decades, it turns out, the stock market on average has performed better when the nation's unemployment rate was higher than when it was lower.
It's quite a marked difference, in fact. Consider a study conducted by Ned Davis Research, the quantitative research firm, in which the performance of the Standard & Poor's 500 index (SPX:
S&P 500 Index since 1948 was correlated with different levels of the unemployment rate.
According to the firm, the S&P 500 produced an average annualized gain of 13.5% when the unemployment rate was above 6%, in contrast to just 2.1% when it was at or below 4.3%. When the unemployment rate was in between 4.3% and 6%, the S&P 500 produced an average annualized gain of 5.2%.
Needless to say, we currently fall squarely in the "above 6%" category, with the nation's unemployment rate rising earlier this month to above 7%.
So maybe the stock market wasn't so crazy on Monday after all.
Why would the stock market in the past have performed so much better when unemployment was high? Ed Clissold, senior global analyst at Ned Davis Research, says that two factors likely played a major role.
The first is that "a high unemployment rate is often followed by stimulus by the Fed and the federal government," which in turn translates into a higher stock market.
The second factor: "High unemployment is also associated with a high degree of pessimism, so by the time the unemployment rate has risen to high levels, much of the bad news has already been priced in to stocks."
Of course, these historical data on the stock market and the unemployment rate reflect averages. So the stock market didn't always perform more poorly when the unemployment rate was low. Nor did it always perform well when that rate was high.
The last six months are a good illustration of this latter point. The unemployment rate rose above the 6% threshold last summer, and since then the stock market has turned in one of its worst six-month performances in history.
But the averages that Ned Davis Research is reporting take this awful recent period into account. This tells you something about the stock market's historically bullish tendencies when the unemployment rate was above 6%: The average for such periods can incorporate a 30% loss and still be 13.5% annualized, well above the averages associated with lower unemployment rates.
The relationship between the stock market and the unemployment rate therefore is yet another illustration of the need to be rigorously empirical and objective in our approach to the stock market. We may think that a particular phenomenon's impact on the stock market is so utterly obvious that it need not even be subjected to historical scrutiny.
But we may very well be wrong. End of Story
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.