Will Rising Unemployment Affect the Stock Market?

If you are confused about where the economy is heading, what you should be doing with your home loan or where to invest, you are certainly not alone.

Uncertainty in the stock market and the economy is causing investors to move into a state of confusion, overwhelm and indecision. Questions are being asked about whether now is the time to fix interest rates on housing loans given rates are at an all-time low, and should we continue to pay our housing loans or do we let the interest compound until things are more certain?

Over the past month or so we have seen a volley of information presented on multiple fronts and at lightning speed. The challenge has been further complicated by contradictions in the information being communicated together with a lot of speculation about what might happen, and exactly how bad things will get.

This week the government passed the rescue package, which will not only keep Australians employed but help businesses survive. Without going back over what occurred during the GFC, I believe the government has learnt from the past and they are a lot wiser now.

Unemployment is expected to rise and naturally people are worried about their jobs, so we may not spend as the government would like us to. How far the unemployment rate will rise is still speculation although we should see some solid figures soon. If we compare the unemployment rate during the GFC, we know it rose from around 4 per cent to approximately 6 per cent and only recently unemployment was sitting around 5 per cent. If we look at little further back to when the bull market started that ended with the GFC, we see unemployment started at over 7 per cent and fell to 4 per cent.

With the Governments stimulus package that has just been approved and the wriggle room that is available with the unemployment rate, it is likely to be some time before we need to start to worry. Given this, things may not end up too bad over the course of this year. That said, with the information overload going on right now, it’s no wonder many Australians are confused about what they should be doing.

For now, I don’t believe the current state of confusion will ease in the short term, so I have always found it beneficial to plan for the worst and hope for the best, that way you have both bases covered.

What are the best and worst performing sectors this week?

With a shortened week on the market due to Eater and the Dow Jones Index now rising, at least for a few days, things may settle a little in our market. So far this week Information Technology has led the way up over 6 per cent. Consumer Discretionary is also up strongly again rising over 5 per cent so far together with the Energy sector, which has also risen by 5 per cent. This is the second week in a row that the Energy sector has risen, which could be a sign that things are changing in this sector, although it is too early to tell.

Consumer Staples has been the worst performer so far and is only just in the green as is the Utilities and Financials sector, which are all up less than 1 per cent for the week so far.

Looking at the ASX top 100 stocks, again we see over 20 per cent of these stocks have risen more than 10 per cent this week. That said, the list of companies achieving this is changing every week, so while it is a good sign, do not read too much into it. Virgin Money was down heavily over the past month but is now topping the list as a top performer having risen over 22 per cent. Two other stocks that were hit hard over the past month include Vicinity Centres and Scentre Group but they have now crawled back rising 21 per cent and 16 per cent respectively.

The worst performers so far this week include Oil Search down over 5 per cent, Brambles is down over 3 per cent followed by IAG down nearly 2 per cent.

What's next for the Australian share market?

While the market has been rising over the past two weeks, it is still very indecisive and showing signs of weakness. The reason I say this is because in 6 of the past 12 days the market has closed higher than it opened, meaning 50 per cent of the time it has closed lower. When markets or stocks unfold like this, it is a sign of indecision and uncertainty.

Right now, we know that the market is trading up, but the question is for how long. In my opinion, given the current indecision it may not be for long. That said, a week can be a long time in the market, so only time will tell.

For now, I believe the best we can expect is that the current upward move in price will continue for possibly another one to two weeks. That said, we should also expect that the market could start to fall away again, especially if there is any bad news. As I have communicated previously, how long and how far the market travels up in price over these coming weeks, before falling away to test the low, will be the key to understanding what might unfold for the rest of this year.

Remember, if the market fails to rise above 5,900 points before falling to test the low, it is highly likely it will fall below the low of 4,429 points from last week. Right now, I encourage everyone to be patient and restrain from jumping into stocks believing you will grab a bargain. There will be plenty of time to make some profits safely when the uncertainty dies down.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.