Will high unemployment be the last straw for this ASX bull run?

The S&P/ASX 200 Index (ASX: XJO) is hurtling even higher today, after a bumper week of returns last week. At the time of writing, the ASX 200 is 1.62% higher at 5,478.4 points.

For some context, we are now over 20% above the lows we saw in March, 23% from the highs we saw in February and back to the level we saw at the bottom of the late 2018 correction.

Over in the US, the situation is remarkably similar, if not better, than the ASX. The S&P 500 Index (a US equivalent to our ASX 200) has risen more than 30% since its March lows and is now only down around 13% from its pre-crash highs.

The NASDAQ Composite is even more striking – it’s only down 7% from its pre-crash highs and is actually in the green year-to-date. Think about that!

So why all this posturing about the past? Well, I think all of these markets – the ASX included – are behaving something like a troop of ostriches. There’s a lot of sand in their ears as they bury their heads and pretend they don’t see what’s going on around them.

The ravages of unemployment

Why do I say this? Well, because we’ve recently found out how many people are facing unemployment queues in the United States – and the numbers are terrifying.

According to the Australian Financial Review (AFR), employment fell by 20.5 million jobs in the month of April, which translates into an unemployment rate of 14.7% for America. That’s the highest level since the Great Depression.

Here in Australia, the AFR is also reporting that our own unemployment rate is tipped to balloon by 540,000 jobs to more than 8% for April – notwithstanding the government’s JobKeeper program.

These are dire numbers. And they also herald a period of intense economic pain in my view.

Putting aside the enormous social costs that unemployment can inflict on society, fewer people in jobs is terrible for economic growth. It’s fewer people going to JB Hi-Fi Limited (ASX: JBH), fewer people driving on the toll roads owned by Transurban Group (ASX: TCL) and more people unable to service their Commonwealth Bank of Australia (ASX: CBA) mortgage.

Do I think this awful reality is being reflected in the stock market right now?

No.

Do I think it will be reflected at some point?

It’s a distinct possibility. There are a lot of factors influencing the ASX right now, including ultra-low interest rates and Reserve Bank of Australia bond-buying programs. But I do think it’s something that the ASX may have to come to terms with in the near future. And it might well be the last straw of this ASX bull run we are seeing play out today.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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