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Improved Unemployment Rate Can’t Push Markets Much Higher

Ian Wyatt

For the first time in 44 months, the U.S. unemployment rate has dipped below 8%.

January 2009 was the last time the rate was this low – just as the Great Recession was still gaining steam. That month the 7.8% unemployment rate was identical to last month’s rate. It eventually swelled to an even 10% by October 2009, and remained largely above 9% until last October.

What did the stock market look like the last time unemployment was this low? Let’s examine.

The S&P 500 was down around the 868 level. The Nasdaq was below 1,600. The Dow was around 8,280.

Things are far different now, of course. All three indices are trading at or near their highest levels since the unemployment rate was last below 8%. At 3,159, the Nasdaq is basically double what it was in early 2009.

Now that unemployment has (technically) dipped back below 8%, will stocks continue their recent ascent? Can the indices get back to where they were in late 2007, before the recession hit?

Don’t count on it. The average unemployment rate in 2007 was 4.6%, with the rate only breaching 5% in December of that year. No one knew a global recession was on the immediate horizon.

These days, there’s a lot more financial baggage. The economic meltdown in Europe and slow GDP growth in the U.S. still weigh on stocks. And as nice as 7.8% unemployment sounds when compared to the 8%, 9% and even 10% depths our economy reached over the past three and a half years, it’s still nearly double where we were for almost all of 2006 and 2007.

So while U.S. markets are getting a nice pop today thanks to the lower rate, don’t expect them to return to late 2007, early 2008 levels just yet. There are too many people still suffering out there for that to happen.