Market decline

If unemployment levels stay low, how low can the stock market go? – Mish Talk

S&P 500 chart courtesy of StockCharts.Com, annotations by Mish.

Where is the market going and when?

Nasdaq 100 monthly chart courtesy of StockCharts.com, annotations by Mish.

Nasdaq 100 monthly chart courtesy of StockCharts.com, annotations by Mish.

On August 29, I asked Gaps Galore on the stock market, where is the market going and when?

My answer

  • I think the S&P is heading towards the 2400 level and the Nasdaq towards the 6000 level.
  • That’s down about 50% from the top of the S&P 500 and down 64% from the Nasdaq.

A reader commented “You publicly declare a low 1% maximum increase in unemployment. This is absolutely CRAZY! There is absolutely no way that either index will dip to these levels without unemployment going above 5% and staying there for the better part of 12 months..”

Recession Rising unemployment rate since 1948

BLS unemployment data, Mish chart

BLS unemployment data, Mish chart

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

BLS unemployment data, Mish chart

BLS unemployment data, Mish chart

The percentages are the beginning and the end of the recession. Unemployment tends to rise after the recession ends, but this was not the case during the short pandemic recession.

S&P 500 discussion for the 2001 recession (main chart)

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

Nasdaq 100, 2001 recession

Nasdaq 100 monthly chart courtesy of StockCharts.com, annotations by Mish.

Nasdaq 100 monthly chart courtesy of StockCharts.com, annotations by Mish.

Nasdaq 100 Recession Notes

  • Between March 2000 and the October 2002 low, the Nasdaq recorded rallies of 43.1%, 32.8%, 53.7%, 59.3% and 22.9%.
  • Despite these rallies, two of which were well over 50%, the market fell 83.5%.
  • The Nasdaq fell 56.9% before the recession even started.
  • The increase in the unemployment rate during the recession was only 1.1%.

JOLT

BLS job vacancies, graph by Mish

BLS job vacancies, graph by Mish

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

Employment levels in retirement age groups

Employment levels by BLS, chart by Mish

Employment levels by BLS, chart by Mish

In addition to the 10.7 million openings, as of January 1, 2022, there were 22 million workers of retirement age still working.

10.3 million of them are over 65 years old. Potentially, millions of them will retire soon enough.

Employment levels

BLS payroll and employment data, chart by Mish

BLS payroll and employment data, chart by Mish

Remarks on the level of employment

Scroll to continue

  • During the DotCom 911 collapse, the employment level declined by 1.1 million.
  • During the Great Recession housing crisis, the level of employment fell by 6.4 million
  • During the Covid pandemic recession, the employment level fell by 22.3 million, and this number was significantly underestimated 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%

Play with numbers #1

  • Assume a decline in employment of 5 million to 153,290,000.
  • Assume an increase in unemployment from 2 million to 7,670,000.
  • Unemployment rate = (7,670,000 / (153,290,000 + 7,670,000)) * 100 = 4.766%

That’s a total increase in the unemployment rate of just 1.3 percentage points.

Play with numbers #2

  • Assume a decline in employment of 3 million to 155,290,000.
  • Assume an increase in unemployment from 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 increase in the unemployment rate of just under 1 percentage point from here.

Pick your numbers and pick a recession start date, but this first set of numbers is pretty robust, estimating a drop in employment of 5.0 million from 6.4 million during the Great Recession.

I highly doubt employment will drop by 5 million, but if it does, most of it will be due to 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 pandemic, the Fed will not press the accelerator for fear of further stoking inflation.
  3. Like the 2001 recession, expect many big stock market rallies that all die on the vine.
  4. Given the strength of employment, the Fed has enough leeway to increase. I expect the Fed to overshoot and then be reluctant to act aggressively for fear of inflation.
  5. The longer the stock market and house prices remain high, the more the Fed is likely to rise.

Expect a long period of weak growth, whether or not it qualifies as a recession

On August 19, I commented Expect a long period of weak growth, whether or not it’s labeled a recession

On August 26, in Jackson Hole, Fed Chairman Jerome Powell pledges to “act decisively” to defeat inflation

Key Powell’s comment: “Reducing inflation will likely require a prolonged period of below-trend growth.”

Fed Openly Applauds Stock Market Drop After Jackson Hole

If you still think my downside targets on the S&P 500 and Nasdaq are crazy, please consider that the Fed is openly encouraging the stock market to fall after Jackson Hole.

This is the biggest stock market bubble ever recorded. It was fueled by massive Fed QE coupled with unprecedented fiscal stimulus.

Despite the current declines, stocks are still priced perfectly, not a long period of weak growth with the Fed openly cheering their demise.

This post is from MishTalk.Com.

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