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Job Loss Equals Market Gain?

An online article sees a positive sign with an alarming news.

Is Michael Mandel too convincing with his market views? Not really. In his latest report in Businessweek, the magazine’s chief economist finds a positive connection between the rising unemployment and stock market rallies. Businesses cut a record of 533,000 jobs in November, the highest since 1980. However, investors surged in the market by heightened buying spree, getting the Dow recovering by 259 points last Friday while Nasdaq also improving by 64 points. Mandel argues that employment declines are early signs of economic recovery since firms are viewed to be cutting back on more expenses in order to keep afloat in the market. He also presented brief historical notes on market reactions after job cuts in the country. He writes,

It harks back to some earlier periods, particularly in the 1990s, when a weak jobs number often served as a signal for stock buying. The assumption was that high unemployment would hold down inflation, and make it easier for the Fed to cut rates.

We believe that this theory holds little significance even if historical patterns prove to bear resemblance. By the mere fact that unemployment has risen, this market reaction would only do good in the short term. Readers have to be aware that improvements in the Dow, Nasdaq and S&P 500 have no immediate effect to consumer purchases. Laid off workers will not be all absorbed in the labor force and thus macro-spending will be lower. Firms will have less output to manufacture and thus create a cycle of job cuts, lower demand, lower manufacturing. If high unemployment could tame inflation and enable the Fed to bring down interest rates, not everyone would still have the ability to qualify in borrowing.

However, such lower rates will enable firms to borrow more and with more capital, they can expand their production and hire more workers. Remember still that such effect will only push through once majority of the country’s economic fundamentals are fueled. That includes job creation which doesn’t have to be discounted in any way. So if Mandel asks, “Is Bad Jobs News Good News for the Stock Market?” Not all the time, Michael.

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