We’d be the first to say investors tend to over-react to most news. It’s not their fault - the media tends to make everything a life-or-death situation…even if it’s not. They’re just trying to sell ad time. The problem arises when investors become desensitized to things they should truly be watching.

As of last week, one of those ‘things’ is unemployment. The move to an unemployment rate of 5% is actually part of a long string of subtle increases in the figure. More than that though, it actually is something that could be a challenge for stocks.

The premise is one we detailed back on September 10th, in our ‘What’s Really Good For Stocks?’ edition of the newsletter. In a nutshell, we looked at how certain economic indicators were assumed to have a predictive effect on stocks, but not proven to do so. Our study of the facts concluded that very few pieces of economic analysis were actually helpful to investors using them to make stock market predictions.

We discovered that certain uses of unemployment data, capacity utilization, and inflation did indeed help make general market forecasts. Many of our readers were surprised that we found no discernible predictive value in GDP, nor most opinion polls (investors are notoriously wrong at the exact worst time).

Anyway, the reason we bring it up now is simple - the unemployment rate sure looks like it’s trending higher. As you can see, those shifts from downtrends to uptrends have not exactly been kind to stocks. The ill effect varied in results and longevity, but it’s a reasonable cause for concern now.

DON’T OVER-REACT! We’re not saying it’s the even of destruction. We’re just saying be aware.