In her still-brief tenure as head of the Federal Reserve Board, Janet Yellen has revealed an unusually keen sensitivity to the plight of the unemployed, especially those who have been seeking work for long periods. Yellen’s concern for this “marginalized” part of the labor market could have major implications for the longevity of the current bull market in stocks.
Of all the events that might go bump in the economic night, a premature and aggressive tightening of monetary policy might top the list. A lack of attractive options, notably in cash and investment-grade bonds, has fed an equity bull market that’s now in its fifth year and ranks among the most powerful in history.
Absent an unwelcome rise in inflation or clear signs of dangerous speculation in risk assets, short-term interest rates are likely to remain at equity-friendly levels until the broader labor market normalizes. Though the nation’s overall unemployment rate has shown dramatic improvement of late, the U-6 component that measures the long-term unemployed and the too-discouraged-to-look has healed at a much slower pace.
For a brief yet comprehensive summary of the issue, read a recent report from the Pew Research Center. The report contains links to in-depth analysis of each potential cause, including the extension of jobless benefits, a mismatch between employer needs and employee skills, a breakdown in labor market efficiency and the role of geography.
A subset of the long-term unemployment problem is a puzzling drop in the labor participation rate, or the percentage of working-age Americans either employed or seeking employment. A report by President Obama’s Council of Economic Advisors estimates that about half of the decline over the last 14 years is the result of demographics.
Not surprisingly, a Gallup poll also revealed a strong link between long-term unemployment and depression. From a human perspective, that’s sad — and potentially tragic. From an economic standpoint, though, elevated long-term unemployment might be good for stocks, because it would keep a lid on inflation while incentivizing the Fed to hold rates lower for longer.
That’s just the way it is.
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