Unemployment Rate Rises: What It Means for Your Money
This morning, the Bureau of Labor Statistics (the BLS) reported that the unemployment rate unexpectedly climbed from 6.1 percent up to 6.2 percent. Specifically, the economy created 209,000 jobs in July. Economists had expected that the economy would create 233,000 jobs and that the unemployment rate would fall to 6.0 percent.
This seems like bad news. After all, the economy created less jobs than expected and the unemployment rate rose. But the stock market hardly reacted. It only fell a fraction of a percent. In fact, earlier in the morning stock futures were pointing to another big down day after the Dow fell 300 points on Thursday. So why didn’t stocks fall substantially on what is seemingly bad news?
There are two reasons for this. First, a lot of investors believe that we live in a world were bad news is actually good. The reason for this is that if the economic news is bad, then the Federal Reserve will be less likely to continue to taper its bond buying program, and if the Fed provides this stimulus, it provides fuel for the stock market. Ironically, it follows from this line of reasoning that good news is bad for the stock market, which will lose this stimulus.
Over the past several years, the stock market has been largely correlated with the Federal Reserve’s stimulus programs. When the Fed has been actively buying bonds the stock market has risen. However, when it has stopped buying bonds, the stock market has corrected. So investors believe that if the unemployment rate continues to climb that the Fed will add to its stimulus program and this will push the stock market higher.
Second, while the unemployment data is a highly politicized event, and while Wall Street makes a big deal out of it, this data doesn’t really impact the earnings of American corporations so much. There are a couple of reasons for this.
The first is that a lot of American companies get a great deal of, or even most of their earnings overseas. We live in a global economy, and the country in which a company is headquarters has less of an impact on its actual source of revenue. In the aggregate, the S&P 500 gets less than half of its revenues from the United States, meaning that the jobless rate in the United States doesn’t matter so much for these companies.
The second is that while a rising unemployment rate may be bad for the economy in the aggregate individual companies cut jobs in order to save money and become more efficient, and ironically this can actually be good for a company and generate a positive response from Wall Street. We have seen this recently, for instance, when Microsoft (NASDAQ:MSFT) shares rose when the company announced massive layoffs as new CEO Satya Nadella is implementing a new plan for the software giant.
Ultimately, I wouldn’t read too much into the jobless data when making long-term investment decisions. While traders, politicians, and the media like to make a big deal out of it, you should be more level headed and distanced from short-term market drivers.
Disclosure: Ben Kramer-Miller has no position in any of the securities mentioned in this article.