The unemployment rate in the United States is at its lowest in the last half-century: it was 3.5% in September, according to the jobs report released on Friday. President Joe Biden celebrated the news during a visit to a Volvo plant in Hagerstown (Maryland): “Just look at today’s jobs report. Our economy created 263,000 jobs last month. That’s 10 million jobs since I’ve come into office. That’s the fastest job growth at any point of any president in all of American history.”
Despite the apparent good news, stock markets fell sharply, and the benchmark S&P 500 index closed down 2.8%.
Why is Wall Street bothered by lower unemployment? It’s tempting to think that investors and bankers are inherently evil and that’s what makes them celebrate bad news and lament good news. But the answer actually lies in interest rates.
Investors and banks – with a few notable exceptions – want the economy to do well and create jobs, so that companies can increase their sales and profits and pay back their loans. There are times, however, when their interpretation of the data seems to be off kilter, and the labor market has been the most recurrent example of this for decades, especially in times of low unemployment and high inflationary pressures.
The US Federal Reserve is aggressively raising interest rates to tackle the highest inflation in four decades. Its chair, Jerome Powell, has made it clear that he believes that it will be necessary to cause “some pain to families and businesses” to curb price increases. The Fed’s dual mandate is to achieve price stability with as much employment as possible. Currently, the first mission is failing and Powell feels that in order to create employment in a sustainable way, it is essential to rein in inflation. He particularly fears that a labor market with almost twice as many job offers as there are unemployed individuals will allow employees to demand salary increases that in turn will raise business costs and bring up prices, in a vicious circle that causes inflation to fester.
Therefore, the Fed is willing to keep raising interest rates aggressively as long as there are no signs that the labor market is cooling. Investors know this, and they also know that further rate hikes have at least two consequences that they are concerned about: on the one hand, they increase the risk of the US slipping into recession later this year or the next; on the other, higher interest rates cause declines in the valuation of long-term bonds and equities. So Wall Street is not making a moral judgment on the unemployment data, it is simply concluding that – in this precise context – if unemployment goes down, the stock market is worth less.
When the market celebrates 'misfortune'
Investors’ interests do not always coincide with what is traditionally understood as good news. When a company undertakes a restructuring with thousands of layoffs, it is common for its shares on the stock market to rise because investors think that this cost cut will serve to increase profits, or at least reduce losses. On the contrary, if a multimillion-dollar investment plan is announced, doubts may arise due to its immediate effects on profitability, and cause a decline in share value.
There are also specific sectors that take advantage of negative situations. Gas companies have been earning more since Vladimir Putin invaded Ukraine. And those who foresaw a hike in the value of cereal, before the war paralyzed part of the harvest in Ukraine, also reaped the profits. Oil is usually sensitive to the resurgence of conflicts in the Middle East and to sanctions, such as those imposed on Iran, which are pushing up prices by adding uncertainty about the supply. Semiconductor firms grew when their supply was not enough to meet strong post-pandemic demand. The same goes for operators of container shipping vessels, which raised their rates following a flood of orders from households with huge accumulated savings as a result of the Covid pandemic confinements.
In the case of Wall Street’s adverse reaction to the good employment data, the chief economist for Europe at Oxford Economics, Ángel Talavera, admits that it certainly does not help the world of investment gain prestige. “I fully understand the perverse logic, but try to explain to a layman that the stock market doesn’t like a strong job market where people get more jobs and earn more... Maybe that’s why finance has a bad reputation,” he says.
In a nutshell, what is good for shareholders is not always good for society, at least not in the short term: a cooler labor market and its corresponding price reduction, is, according to central banks, the sacrifice to pay in order to return to healthier growth in the future.