While it’s true that a significant year-over-year increase in unemployment insurance claims often correlates with a rise in stocks, it’s crucial to remember that this is not a foolproof strategy used with other investment strategies to ensure a well-rounded approach.

For example, whenever the year-over-year rise in claims has been above 60%, stocks were up an average of 30.7% twelve months later.

Investing in stocks when unemployment insurance claims have surged more than 60% has proven to be a promising strategy. Even in the worst-case scenario, the market has seen a 10.% gain, as in May 1975. On the flip side, the best outcome was an astounding 47% gain in July 1954, showcasing the potential for significant returns.

It’s important to note that such significant increases in unemployment insurance claims are rare, occurring in only twenty-one months out of the last forty years. This rarity underscores the value of finding a reliable rate of increase in claims that can serve as a valuable indicator for bull markets.

The 15% Rule

One good trading guide we use is the 15% rule. Stocks will almost always outperform other investments whenever unemployment insurance claims have increased 15% or more from the prior year.

The results of buying and holding stocks whenever the year-over-year increase in claims has been above 15%; therefore, sell whenever this is no longer true.

Since the early 1950s, this system has slashed ten buy signals or about one every two to three years. Nine of these ten times, stocks rose. On average, stocks scored a hefty average annual gain of 18.1%, not including dividends. Compared to the mere 7.8%, a buy-and-hold strategy would have netted. 

Gains from using the 15% rule would have been over 20% more often than not. From a historical perspective, from November 1953 to January 1955 (for example), stocks shot up more than 50%. Additionally, from October 1990 to October 1991, stocks raised an annual gain of 23.8%. And you would have avoided every primary bear market during the period.

To dramatize this relationship even more, suppose you acted contrary to this rule, buying only when unemployment insurance claims fell by more than 15%—in other words, buying on good news.

Getting Results

As we mentioned in this article, figures for weekly and monthly unemployment insurance claims take a lot of work to get. But once you find them, their relative obscurity works nicely to your advantage.

Changes in the widely publicized unemployment rate or payroll employment data routinely cause short-term fits and starts in the market. Nobody reacts that way to unemployment insurance claims. Most media do not pick up the “unemployment” weekly report. As a result, you have an excellent lead time to act whenever the results change.

Deep Dive Into The Data

Below is a review of how to find and use unemployment insurance claims:

1. Get the most recent monthly average of initial state unemployment insurance claims; the data is typically published regularly. The best source for this is the U.S. Bureau of Labor Statistics: https://www.bls.gov/schedule/news_release/empsit.htm

2. As a comparison, I’ve included the monthly average of unemployment insurance claims for the same month a year ago. You can get unemployment insurance claims for prior months from the Department of Commerce Business Statistics summaries and supplements found on credible government websites. These websites publish the most recent year of data available.
3. Subtract the year’s average unemployment insurance claims from the current year’s. Divide the result by the prior year’s to find the annual percentage rate of change in claims. For example, purposes, suppose the average March 1993 unemployment insurance claims were 375,000. If March 1992’s average claims were 350,000, the year-over-year increase in claims would be 25,000. By dividing, you find a percentage gain of 7.1% [25,0000 / 350,000] x 100.
4. Could you compare your results with how stocks have performed during similar rates of change in claims? Using our example above, a 7.1% rise in unemployment insurance claims is less than what our 15% rule says is bullish for stocks. An average gain for stocks at that level of claims is only 4.9%. Therefore, though stocks would rise, you’d probably want to avoid a significant commitment to the market.

All Together

As a single indicator, unemployment insurance claims have an excellent record of correctly forecasting the stock market one year out. Following them alone can yield substantial returns nine times out of ten.

However, unemployment insurance claims are not 100% effective like any other indicator. For example, stocks fell from February 1974 to December 1975 while claims rose more than 15% yearly. Several different times, the market rose but managed only subpar gains. And once, from March 1955 to March 1956, our rule for unemployment insurance claims completely missed a 34.4% gain in stocks.

Claims failed to forecast the future during those times because other factors outweighed the effect of unemployment on inflation. In the 1970s, for example, oil and other commodity prices were raging out of control. As a result, stocks fell even though unemployment was rising. 

Conversely, in the mid-1950s, the aftermath of the Korean War sent producer price inflation into freefall. Despite low unemployment, the economy had plenty of room to grow without igniting inflation.

Always remember that the employment picture, though very important, is only a building block that makes the market tick. That’s why unemployment insurance claims should always compared with other indicators, especially inflation. However, if you follow the lead of insurance claims, you’ll be ahead of the crowd. And the next time Wal Street and the media fret about the employment scene, you’ll be ready to take advantage of it.

Wrap Up

Key takeaways from today’s intel…

• Rising unemployment is bullish for stocks because the economy has room for sustainable growth without igniting inflation. Falling unemployment is bearish because the economy is rapidly approaching the limits of sustainable development, and inflation is a threat.
• The best measure of unemployment is the twelve-month rate of change in initial unemployment insurance claims. The higher the rate of change, the more bullish stocks are. Falling or negative rates of change are bearish stocks.
• Buy stocks when claims are rising faster than 15%, year over year. Sell when the rate of change slips below that.

Disclaimer: Investors should make investment decisions based on personal financial goals and objectives. We aim to educate investors to make informed decisions by featuring historical financial and economic data publicly available on the CRB Commodity Index and Producer Price Index websites, along with the Bureau of Labor Statistics.