FULL EMPLOYMENT'S MARKET INFLUENCE

There's some debate about what constitutes full employment. From what we read employers are doing everything they can to keep overheads down and that includes hinting more part-time and temporary workers. There is also those energy patch jobs that disappeared and the yet to be fully-felt minimum raise recipients and how employers choose to deal with that.

Indeed, the annualized return of the overall stock market is 50% lower once full employment is reached and many sectors (e.g., Chems, Shops, Durable, Other, and NoDur) produce returns which are only about one-third of what they are when the unemployment rate is above 5%. Full employment brings new challenges for the stock market. Continued economic growth typically produces cost-push pressures eroding profit margins and inflation and interest rates usually begin to rise.

Although full employment does not necessarily end a bull market, it does tend to significantly lower future stock returns. Full employment also typically brings a leadership change in the stock market. Before the economy reaches full employment, returns across the stock market are much higher compared to when the economy is at full employment. Overall, the annualized U.S. stock market total return averaged about 15% when the economy was at less than full employment compared to only about 7% once full employment is reached.

Second, the dispersion of sector returns within the stock market widens considerably once the economy reaches full employment. Before full employment, the stock market sector return differential is only 4.27% (i.e., the difference in annualized returns between the best performing sector and the worst sector . However, the sector return differential widens considerably to 9.31% once the economy operates at full employment.

barrons.com/articles/what-the-low-jobless-rate-means-for-stocks