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As American Public Media’s Marketplace host Kai Ryssdal is fond of saying, “the market is not the economy and the economy is not the market.”  We’ve had a clear indication that this is true of late as volatility in the stock market has reached bear market territory by many definitions.

This market drop has been surprising to some given that our economy continues to thrive.  Many companies report strong earnings.  Others continue to buy back stock at a furious pace.  Unemployment is at or near all-time lows.  Holiday spending was reported to be strong.

So, what gives?

Well, as Warren Buffett famously once said, investors should be “fearful when others are greedy and greedy when others are fearful.”  That makes sense intuitively.  We know we need to buy when prices are low and sell when they are high to be successful investors, but do returns really bear out that the market performs better when the economy is bad?

According to one measure, it certainly does.

Eddy Elfenbein, editor of the financial blog Crossing Wall Street, recently posted statistical data he compiled in light of the recent market pull back.  Looking at both monthly returns of the S&P 500 and  monthly unemployment rates from the Bureau of Labor Statistics going all the way back to 1948, some interesting insights emerged.

It may not surprise you to learn that the S&P 500 has returned 11.4% per year over the 70-year stretch from 1948 to 2017.  The well-known index of 500 large American companies listed on the New York and Nasdaq stock exchanges has returned just north of 10% per year going all the way back to 1926.

But, when you sort the data described above according to the unemployment rate, the S&P returns show something very interesting.  See the table below showing annualized S&P 500 returns during varying periods of U.S. unemployment over the last 70 years.


S&P 500 Returns


4.71% per year


7.83% per year


18.09% per year


22.17% per year

Let that sink in for a moment.  When unemployment is below 4%, when the economy is seemingly at its healthiest, the S&P returns less than half of its long-term average.  When the economy is struggling the most and unemployment reaches 8% or more, the return is nearly double its 11.4% average over seven decades.  It makes intuitive sense given all we know, but it can feel very strange when living through a period of underperformance.

Does this mean we must cheer for the economy to turn south to have any hope of getting the market back on track?  Not necessarily.  It simply means that risk and return continue to be inevitably related and that to continue reaching ever higher peaks in the market, we must continue to go through periods where we hit the reset button, allow governments, markets and companies to catch their breath, evaluate what they’re doing well, what needs further regulation and what needs to be stopped altogether.  These breaks are what allow for continual improvement and for opportunities for new investment to come in while things are “on sale”.

While we hope that 2019 is a positive one both in the economy, the market and the world at large, it is a good reminder that temporary setbacks in investing are part of the risk we expect to endure on a path to a successful, long-term experience.