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Wall Street’s nine-year-old bull market has survived Washington dysfunction, euro zone crises and global trade frictions. But now it faces what could be its biggest threat of all - one of the lowest unemployment rates in recent history.

Granted, that sounds odd. Extremely low unemployment is generally considered a fine and noble thing. And so it is – except where the stock market is concerned.

Between 1960 and last year, U.S. unemployment has sunk below 4 per cent during only two periods. Both occurred when stock markets were very close to a top.

In April, 2000, for instance, U.S. unemployment fell to 3.8 per cent just as the dot-com bubble popped. Back in 1966, unemployment slid below 4 per cent as Wall Street began an excruciating decade-and-a-half of miserable returns.

In short, the past two generations of market history gives investors plenty of reason to be worried on the rare occasions when U.S. unemployment sinks below 4 per cent – as it did in April. The trend continued in May, when the number hit 3.8 per cent, the lowest level since 2000.

Why is low unemployment such a concern? For starters, it suggests inflationary forces are building. The Federal Reserve typically responds by ratcheting up interest rates. The rate hikes are intended to cool off the economy, but they also have a chilling effect on stock prices.

In addition, low unemployment indicates that job markets are getting tighter, which implies that workers will soon be able to demand higher wages. As wages grow, they crimp corporate profits, creating more bad news for stocks.

One way to think about all this is to view extremely low unemployment as a signal the economy is operating close to capacity. Most of the good news is presumably already embedded in stock prices, leaving little fuel to propel the market even higher.

To be sure, an unemployment reading below 4 per cent doesn’t mean the stock market is going to roll over tomorrow. More than half a century ago, the jobless rate broke below the 4 per cent line in February, 1966. The market didn’t tank. It actually edged slightly higher over the next three years, as unemployment continued to fall, hitting a low of 3.4 per cent in 1968.

But even in that case, the low unemployment rate was a powerful signal the bull market was essentially exhausted. For the next few years, the S&P 500 moved sideways. In early 1978, nearly 12 years after that initial sub-4-per-cent unemployment reading, the index was still below where it stood in 1966.

The picture gets even worse if you factor in the runaway inflation of the era. An investor who faithfully held the S&P 500 for 17 years, from the start of 1966 to the end of 1982, would have finished with zero real return, even including dividends, according to money manager Ben Carlson of Ritholtz Wealth Management LLC.

Of course, sometimes the time lag between sub-4 per cent unemployment and a bear market is much shorter than it was in the 1960s and 1970s. When unemployment broke below 4 per cent in early 2000, it occurred at nearly the same moment the S&P 500 hit its high during the dot-com madness. The index went on to plunge more than 40 per cent over the next three years.

Could this time around offer a better outcome? Never say never. Given the rarity of sub-4 per cent employment, nothing is for sure.

The happiest outcome would be if today turned out to be like 1953. Back then, U.S. unemployment hit 2.5 per cent, its lowest level yet, without triggering a stock market fall.

But that was in a postwar economy, full of pent-up demand and baby boomers still in diapers. Today’s environment is radically different.

The biggest hope for the current market is that the relationship between unemployment and inflation has fundamentally changed, in ways that might allow the Fed to avoid a punishing round of rate increases. Some economists argue this is the case. Maybe today’s unusually low unemployment rate is hiding hordes of workers who have dropped out of the work force or are only partially employed. If so, the U.S. economy may have more room to grow without triggering a counterblast from the Fed.

Still, you may want to restrain your hopes of big gains still ahead. “Historically, a trough in the unemployment rate also tends to be a reliable indicator of a business recession,” Kevin Kliesen of the Federal Reserve Bank of St. Louis wrote in a note on Friday. In fact, he finds that unemployment troughs – that is, the lowest unemployment readings during a business cycle – signal impending recessions just about as reliably as an inverted yield curve, the most famous recession indicator of them all.

The problem, of course, is that, unlike an inverted yield curve, you don’t know you’ve seen a trough in the unemployment rate until it’s well in the rear view mirror. But, if history is any guide, U.S. unemployment at 3.8 per cent looks to be very close to a trough. Investors should be wary.

When good news is bad news

Over the past six decades, U.S. unemployment has only rarely fallen below four per cent. In the late 1960s and in 2000, those extremely low jobless levels were followed by bad times for stocks.

U.S. unemployment rate, seasonally adjusted

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Feb. 1966: Unemployment rate slips below four per cent. Over the next 17 years, the S&P 500 produces zero return, after inflation.

April 2000: Unemployment rate slips below four per cent. Over the next three years, the S&P 500 loses more than 40 per cent of its value.

April 2018: Unemployment rate slips below four per cent.

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: federal reserve bank of st. louis

When good news is bad news

Over the past six decades, U.S. unemployment has only rarely fallen below four per cent. In the late 1960s and in 2000, those extremely low jobless levels were followed by bad times for stocks.

U.S. unemployment rate, seasonally adjusted

12%

10

8

6

4

2

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1960

1970

1980

1990

2000

2010

‘18

Feb. 1966: Unemployment rate slips below four per cent. Over the next 17 years, the S&P 500 produces zero return, after inflation.

April 2000: Unemployment rate slips below four per cent. Over the next three years, the S&P 500 loses more than 40 per cent of its value.

April 2018: Unemployment rate slips below four per cent.

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: federal reserve bank of st. louis

When good news is bad news

Over the past six decades, U.S. unemployment has only rarely fallen below four per cent. In the late 1960s and in 2000, those extremely low jobless levels were followed by bad times for stocks.

U.S. unemployment rate, seasonally adjusted

12%

February 1966: Unemployment rate slips below four per cent. Over the next 17 years, the S&P 500 produces zero return, after inflation.

April 2000: Unemployment rate slips below four per cent. Over the next three years, the S&P 500 loses more than 40 per cent of its value.

10

8

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April 2018: Unemployment rate slips below four per cent.

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1960

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JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: federal reserve bank of st. louis