On Friday the Bureau of Labor Statistics announced that the economy added 257,000 jobs in January and increased its estimate of last year’s job gains. The 3.1 million jobs that were added in 2014 according to the latest numbers were the most since the turn of the century, and 2015 seems to be off to a strong start as well. So what does this job market boom mean for your portfolio? The answer, perhaps surprisingly, is “probably not much.”
We’ve noted in the past that there’s only a weak relationship between the strength of the economy and how well the stock market performs. This can be seen in the graph above, which shows the relationship between how many jobs the US economy has gained or lost each year (on the x-axis, shown in millions) and the annual returns of US stocks (on the y-axis) over the past 10 years.
The black line shows that there has been a positive relationship between job growth and stock market performance, but it’s not a very strong one. (For the statistically-minded, the job growth explains less than 10% of the variation in stock market performance during this period).
There are clearly some years where the job market and the stock market moved in the same direction: 2008 had massive job losses and a tanking stock market, while 2013 had job gains and a stock market surge. But there are also years where there’s seemingly no relationship. In 2009 the economy shed almost 5 million jobs while US stocks rose by almost 30%. The stock market was flat in 2011, when there were almost as many job gains as in 2013.
This weak relationship doesn’t mean that the job market is completely meaningless when it comes to your portfolio. It could have less direct effects on a number of investments by affecting when the Federal Reserve starts to raise interest rates and whether the US dollar continues to gain in value against foreign currencies. But by itself the fact that the US economy looks likely to have another year of strong job growth doesn’t reveal much about how the stock market will perform.