If the stock market is rising and giving you solid gains, chances are it is what’s known as a Bull Market. And it is the dream of most investors to be fully invested when a new bull market has just begun.
Your peers may laugh at you for attempting such a thing – “impossible!” they will say. Your accountant may just smile and mutter something about the market always going up in the long term. But look at 2008! What if there was a way to be fully invested in the stock market the next time a bull market was starting?
This is where the unemployment rate comes in. Unemployment doesn’t rise too much if the stock market and economy are going well – at least according to economist Ken Fisher in his book “The Wall Street Waltz”. When people are in work, companies are making profits and both are spending their hard-earned dollars, the stock market will usually follow suit and rise with it.
But when an economic recession hits, as many people will know from the 2008 bear market and recession, the reverse happens as unemployment starts to rise and people spend less, the stock market declines.
This is where Ken formed his “1 Percent Rule” – where if unemployment figures rise by more than 1 percent, this is a good time to start putting money back into the stock market. While it is hard to pick the exact bottom of a new Bull Market, Ken says this rule will get you in the ball park and ready to take advantage when it comes along.
Another way to say it is that cyclical stock market lows thoughout history haven’t happened without a 1 percent rise in the rate of unemployment. It happened in 1970 after two years of falling stock prices, and it happened in 2009. But also many times along the way.
There is one caveat however – the unemployment rate is not as reliable when it comes to predicting peaks in the market. This is because the stock market actually leads the over economy anyway in that regard. But Ken did find that a major peak in stock markets rarely happened without unemployment falling (jobs up) for two years.
So what can you do with this information? Well next time the stock market is falling in a bear market, keep an eye on the news for a time when the unemployment rate rises more than 1 percent. When it does, it might be a good time to get back in the stock market.
Get your free course on stock market investing, and free research on stock trends at Dave’s site www.asxmarketwatch.com .
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