US unemployment is the lowest in 50 years. Here's why Wall Street thinks that's actually a bad thing.

Wall Street trader

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  • The unemployment rate stands at 3.5%, the lowest rate in a half-century, according to the latest figures released Friday by the Bureau of Labor Statistics.
  • Conventional economic thinking maintains that low unemployment signals the economy is robust and prospering on all fronts.
  • But one powerful sector actually thinks its a bad thing: Wall Street.
  • Investors usually balk at the idea of low unemployment because it adds pressure to the Federal Reserve to raise interest rates and make it more expensive to borrow money.
  • Higher interest rates cause government bonds to become more appealing compared to stocks.
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The unemployment rate stands at 3.5%, the lowest rate in a half-century, according to the latest figures released Friday by the Bureau of Labor Statistics. The last time it reached that level was December 1969.

It's an astonishing recovery for the American economy only a decade after the collapse of major financial institutions like Lehman Brothers helped spark a global financial crisis.Advertisement

Conventional economic thinking maintains that low unemployment signals the economy is robust and prospering on all fronts. That's good for Americans who are looking for work as it tends to be a period when employers raise wages and compete to hire workers.

But one powerful sector actually thinks its a bad thing: Wall Street.

Investors usually balk at the idea of low unemployment because it adds pressure to the Federal Reserve to raise interest rates and make it more expensive to borrow money. It guards against runaway growth and inflation, when the prices of goods rise and cash buys less.
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Higher interest rates causes government bonds to become more appealing compared to stocks as a safe investment. Bonds have a return guarantee where stocks don't, lowering their risk for investors.

Mark Hulbert of Marketwatch delved into the performance of the S&P 500 since 1948 and found its biggest returns occurred when unemployment was above 7.2%. By comparison, it only grew around 2.8% when unemployment stood below 4%.But investors probably don't need to worry about a looming rise in rates. The Fed has cut rates three times this year, according to Bloomberg. And the strong November jobs report made it less likely it will cut rates further due to the nation's strong economic performance.Advertisement

"The Fed can now sit back on the shelf, not have to worry about having to be pestered about lower rates," Ward McCarthy, chief financial economist at Jefferies, told CNBC.

However, the strong job market is pushing some experts to reevaluate how fast the economy can grow with inflation and the interest rates still low at 1.6%. With a booming stock market, investors may yet learn to love the low unemployment that's anchoring the US economy.

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