September 11, 2007
-- by Dave Johnson
The stock market plunged Friday afer the terrible jobs report for August. Sometimes the market goes up on bad news , this time it went down. It turns out this might be an indicator of recession.
The researchers found that when the economy was in recession - as later determined by the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end - the stock market typically fell when the unemployment news was unexpectedly bad. But when the economy was in an NBER-declared expansion, more often than not the market rallied.Maybe...
The reason the market reacts differently during recessions than during expansions, according to the researchers: When the economy is growing, the positive effect of a strong jobs report is more than outweighed by the negative effect of the interest-rate increases that such a report makes more probable.
Just the reverse is the case following a weaker-than-expected jobs report. Now the bad news of the jobs report is more than outweighed by the good news that the Fed will have less pressure on it to raise rates.
During recessions, in contrast, interest rate hikes are less of a threat. So a strong jobs report is taken at face value as good news, and a weaker-than-expected report is considered to be bad news.
... The market's plunge Friday in the face of unexpectedly bad job news is yet another straw in the wind that the economy may be a lot weaker than previously had been thought.
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