Is Bad Jobs News Good News for the Stock Market?

Investors reacted to the distressing jobs report with feverish buying, with the thought that layoffs signal a preparation for higher profits and recovery

According to the latest employment report, released Dec. 5, jobs are disappearing like snow in a fire. In November alone, 533,000 jobs were eliminated. And over the past three months, employment in the private sector has dropped by 1.1%. That's the biggest decline (, 12/5/08) since 1980. And really, you have to go back to the end of the 1974-75 recession to see jobs disappearing at an even more dizzying rate.

But here's the paradox. Investors absorbed the horrible jobs report, and started buying—with a passion. By the end of the Friday session, the Dow Jones industrial average had surged 259 points, more than 3%, to 8,635, while the Standard & Poor's 500-stock index jumped 3.7%. The Nasdaq index gained 4.4%, or 64 points. Rather than treating the jobs collapse as a sign of impending depression, the market took the more optimistic perspective that companies were cutting their workforces as an essential preliminary to higher profits and an economic recovery.

Is this burst of optimism from investors warranted? 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.

The More Layoffs, the More Stimulus

Today, the mechanism is likely a bit different. The Fed is already entrenched in a low-rate mode, and not apt to change anytime soon. However, the ultimate size of the fiscal stimulus package coming in 2009 depends on how dire the economic situation appears. The more people who are touched by unemployment, the bigger the stimulus President Barack Obama is likely to propose when he takes over in January—and the easier that package will be to move through Congress. One trillion dollars in new federal spending over the next couple of years, 6% or 7% of U.S. GDP, is well within the range of possibility. As that kicks in, it will propel both growth and profit opportunities for many companies.

Another comparison with earlier declines: Big drops in employment have typically come near the end of downturns, not at the beginning. For example, the long and nasty recession that started in November 1973 and ended in March 1975 had one three-month period where private-sector jobs plunged by a horrible 2.4%. But that came in late 1974 and early 1975, when the recession was nearly over.

Will the same thing happen this time? There's no way to know. But at least for right now, the stock market is telling us that even bad news can be good news.

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