By Steve Bruce
Historically, the U.S. labor market has been one of the most reliable early warning signs of economic slowdowns. Rising unemployment has often preceded weaker growth—and eventually recessions.
One commonly cited metric looks at when the unemployment rate (U3) rises above its 3-year moving average. Since 1950, that crossover has typically occurred near the start of a recession—on average, about a month after the official onset.
But the past few years have broken the pattern.
The unemployment rate has been above its 3-year average since June 2024, and yet—no recession. This marks the first time in more than 75 years that this signal has failed to coincide with an economic downturn.
So does rising unemployment still matter?
Absolutely—from an economic standpoint.
But for investors, the answer is more nuanced.
Here’s the surprising part:
- Since 1950, when unemployment was above its 3-year average, the S&P 500 delivered an average return of 11.3%
- That compares to a 9.3% long-term average
- The market was positive 87% of the time, versus 74% in all other periods
That said, this doesn’t mean rising unemployment is “bullish.” Historically, periods when unemployment is above trend have also been associated with higher volatility and an increased probability of bear markets. Drawdowns can be sharper, sentiment more fragile, and risk management becomes more important.
Where the data falls short is as a broad market-timing tool. Elevated unemployment has not reliably told investors when to get out—or when to get back in. In fact, many of the strongest long-term returns have occurred during precisely these uncomfortable, uncertain periods.
The takeaway isn’t to discard economic indicators—they can still be useful for tactical decisions. But history suggests long-term investors often do more damage by reacting to macro signals than by sticking to a disciplined plan aligned with their risk tolerance, liquidity needs, and time horizon.
Sometimes the hardest decision is also the right one: staying invested.
Steve Bruce, CMT is the Co-Founder and Chief Investment Officer of Bruce Wood Capital, where he focuses on systematic global macro strategies and long-horizon, data-driven research.
