Unemployment and Stock Market Rising

Hello Readers,

In this article, I discuss the correlation between unemployment and the stock market. I additionally offer resources that may help alleviate your financial situation.

Key Points

  • Reviewing current unemployment levels in the US.
  • Resources for unemployment benefits in Washington.
  • Explaining why the stock market is rising.
  • Advising against speculating.
  • Suggestions on what to do for the coming weeks, regarding money and skills.
  • A poll for future articles.

Unemployment Reaching New Heights!

Many individuals have either been affected directly or know someone that has been affected due to the cascading effects of COVID-19.

Layoffs are common during times of financial hardship and it is expected to continue as shelter-in-place orders are prevalent. As of right now, the US has reached an unemployment rate of 4.4% and expected to continue rising.

According to TradingEconomic’s forecast, we are expected to reach an unemployment rate of 15% by July 2020. While Bloomberg’s forecast is expecting to reach an unemployment rate of 20% by the end of April. Both of these sources are highlighting the cascading effects of COVID-19 and its devastation across our economy.

Unemployment claims reaching all time highs since 1967

To give you an idea of how drastic the situation is, the graph above illustrates the number of people claiming unemployment benefits in the past three months.

As production is coming to a standstill in many countries, shelter in place orders are worldwide, and small businesses are being wiped out as we speak. I believe that this domino effect will have catastrophic levels of damage to our society once this ordeal ends.

Resources for unemployment benefits

In order to alleviate financial burden, I have compiled a list of current unemployment benefits within Washington, including a national unemployment benefit.

Although these are restricted to Washington, I encourage you to search up unemployment benefits in your state if you have not already signed up.

If you are pursuing higher education, I recommend reaching out to your financial aid office on campus. They will be able to direct you to resources that could alleviate your financial burden.

Stock Market Rising?

In this volatile market predicting the stock market’s performance on a given day is practicing your ability to shoot precisely in the dark.

There is no telling what direction it could continue to go in the future but with our current conditions. I believe that we have not seen the end of the volatility within the stock market. Instead, this slight rise in the market is due to the brief effects of the stimulus check and positive news from the White House.

How could the market continue to rise after the brief effects of the stimulus plan wears off? There are 22 million people unemployed, businesses are closed and production in many factories have ceased operations.

The correlation between unemployment and the stock market’s valuation is surprisingly an inverse relationship. This might be confusing to many but it is important to note, that it breaks down to two main topics.

Investors look for two types of information when evaluating if a stock is worth purchasing during downturns. Future interest rates and future corporate earnings and dividends. In many cases, during economic downturns, stocks are considered to be on sale.

Disney’s stock valuation chart from TradingView

To put it into perspective, Disney (NYSE:Dis), before the outbreak was hovering over $149 per share. After shelter in place orders and unemployment started to rise, the stock dropped to around $85 per share in March. Now, in April, it has jumped back up to $102 per share.

Investors including myself, are noticing that these high quality companies are at a significantly cheaper price point. Therefore, it would only make sense to purchase stocks that I believe are capable of being around in the next ten years.

To reiterate, investors are buying companies that are on sale, capable of creating future earnings and dividends. I highly encourage you to give this research a read as they detail out the process that investors follow.

In a statement from Dr. Fauci during a White House briefing, he spoke about the turning point for deaths by the end of last week. As more positive news continues to appear on media, the stock market will have brief rising moments, while continuing on a downward trend. Until a vaccine is developed, I strongly believe that our economy will be tested in the coming months.

Daily new confirmed covid-19 cases US chart v World

The graph above, illustrates a downward trend from last week’s number of daily new cases. This is a great step forward as we are finally seeing a reduction in number of cases. However, this does not mean we should immediately remove shelter in place orders, effectively putting our efforts to waste with a second outbreak.

I am not trying to instill fear, instead I hope that everyone reading this is considering to be cautious with their money in these uncertain times. To explain the dangers of the current market’s brief rise, I will elaborate on what a dead cat bounce is.

Dead Cat Bounce

In a literal sense, this graphic term is exactly how the market would reflect. If you were to drop a dead cat from a high altitude, it would bounce back up and eventually plummet back down.

To illustrate this we will use NASDAQ:CSCO (Cisco) as our reference.

CSCO Valuation chart from TradingView

As we can see, CSCO was at a phenomenal high of $81.51 per share in March 2000, following that month CSCO declined to $50.02 per share in May, eventually rising up for a brief moment, then plummeting to $15.81 per share in March 2001 during the dotcom crash.

DJIA Valuation chart from TradingView

The correlation between CSCO’s valuation in 2001 to our current economy, is familiar in a sense that we are seeing a brief rise in the stock market. Despite conditions that would state otherwise, the market continues to rise.

Comparing both charts, we can see similar trends within history. Looking back to 2008, we can see brief moments of the stock market rising while companies continued to rack up debt and begin to file bankruptcy.

It is important to remember that the stock market correlates with uncertainty and an inverse relationship with unemployment. The more uncertainty there is, the poorer the market performs. Yet, with this known fact it is acting irregularly. Which is always the case when dealing with the stock market, no one can predict which direction it will rise or fall.

Avoid Speculating

If you have been listening to relatives or strangers about how they have lost fortunes in the stock market. Odds are their investments were not diversified enough or their investments were poor choices.

There are plenty of people on the internet, venting their frustration about why the market is rising while unemployment is reaching all time highs.

Although their concerns are well deserved, it is their tactics that makes them spiteful of current conditions. I am referring to risky investment strategies such as utilizing puts, options and calls. These are all speculative approaches to an inexperienced investor and if used improperly could result in devastating losses.

As a reminder, speculating is not investing. There might be instances where you were fortunate in finding returns, but you are practically gambling your money away in these risky endeavors.

Speculating is okay if you are not applying it directly to your investments. However, the second you consider speculating as an investment strategy, you will be met with disappointment in the long run.

Think long term for investing

I am an avid supporter for long term growth, especially when it comes to investing. There is little work that you have to do when considering long term investment strategies.

Your ability to utilize compound interest and dividends to your advantage is the best leverage you have the younger you start. Long term investing also reduces your taxes, since you are not susceptible to short term gains tax.

You are less susceptible to being fearful that your stocks are losing value in the short term as well. Since the economy will always rebound at some point and to greater lengths. Your concern with short term losses will not be as significant compared to someone with short term plans.

Suggestions for coming weeks

In order to remain confident in times of uncertainty, I urge you to consider saving more than investing if you are worried about future payments.

My suggestions to handling this situation is the same as always. Refrain from falling into the category of speculator and continue investing at your discretion. Continue saving a majority of your money while uncertainty looms across the country.

Do your part, during a pandemic that has been gathering plenty of social media attention. Continue social distancing and maintaining excellent hygiene levels.

Refine your skills if you are unemployed, consider learning a new skill while shelter-in-place orders are in effect.

Remain informed by using trusted websites that are covering the spread of the virus.

I encourage you to do something productive while we are in quarantine, allowing yourself to be reintroduced to society with a new set of skills or hobby. This in turn will make quarantine less dreadful to some and reinforce the importance of social distancing.

Poll for next topic

As always, I hope you found my article informative and persuasive. If you have a moment, I would love to hear your feedback on what topics you find interesting.

Feel free to reach out to me if you have any questions, concerns, comments and feedback, I will not disclose your name without your consent.

Published by Steven Mai

Hello! My name is Steven Mai and I am currently enrolled at University of Washington. My interests are business, investments, financing, and personal development. I hope through this journey I will be able to enhance my skills as a writer and share my ideas on a public platform and gain the necessary skills in life through interactions with the community.

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