"Bad Job News Is Good News": Why U.S. Stocks Hit All-Time Highs Despite Rising Unemployment [Weekend Money]

Despite the worsening employment situation in the United States, some analysts argue that there is no need for concern. The reason is that worries about further interest rate hikes have eased due to weaker employment indicators, which has in turn reduced the burden of higher rates.

According to IBK Investment & Securities, there have been 19 instances since 2000 where the S&P 500 Index fell more than 2% on the release day of the nonfarm payrolls report. Among these, 10 were cases in which weak employment figures were the primary cause of the decline. In 5 instances, strong employment data sparked concerns over tighter monetary policy, leading to declines, while in 4 cases, the drop was due to factors unrelated to employment.

However, the equity market’s response to the current employment downturn was different. In July, new nonfarm payrolls in the U.S. decreased by 23,000, falling far short of the expected increase of 80,000. In addition, the May and June new nonfarm payrolls were also revised downward to 63,000 and 20,000, respectively. Even so, the S&P 500 Index rose 0.62% on August 7 (local time), reaching a new all-time high.

The market interpreted this as “Bad Job News is Good News.” Yesl Kim, a researcher at IBK Investment & Securities, stated, “Currently, the slowdown in employment is not considered a significant concern for the stock market,” adding, “Ahead of the September Federal Open Market Committee (FOMC) meeting, as uncertainty over monetary policy has increased, expectations for rate hikes have subsided following the weak July employment data, easing the pressure from higher interest rates. Right after the nonfarm payrolls report was released, the Chicago Mercantile Exchange (CME) FedWatch tool showed the probability of a September benchmark rate hike dropping from 55% to 44%.”

Additionally, the Institute for Supply Management (ISM) Manufacturing Index for July rose 2.3 points from the previous month to 55.6, marking the highest level since May 2022. Kim noted, “With the ISM Manufacturing Index climbing to 55.6, we have clear evidence of expansion in the manufacturing sector. Even among the detailed figures, new orders have improved, confirming a recovery in demand. This is why it is difficult to interpret employment slowdown as a signal of recession.”

Corporate earnings momentum also remains strong. The 12-month forward earnings per share (EPS) growth rate for the S&P 500 is continuing its steep uptrend, and this pattern is especially pronounced among technology stocks. Kim observed, “This year, the number of layoffs announced by U.S. technology companies stands at 140,000, accounting for 30% of all layoff announcements, and major hyperscalers—such as Amazon, Oracle, Meta, and Microsoft—alone have announced 50,000 job cuts. However, during the same period, the earnings revision ratio for the IT sector has exceeded 50%, indicating that profit forecasts are actually improving.”

The variable to watch most closely now, according to analysts, is the price of oil. In the past, periods when employment weakness gave rise to stagflation concerns were typically accompanied by rising energy prices. For example, on June 6, 2008, when new nonfarm payrolls fell for the fifth consecutive month and the unemployment rate rose from 5.0% to 5.5%, crude oil prices soared and the S&P 500 dropped 3.1% from the previous day. In March of this year, a combination of rising oil prices—driven by geopolitical tensions between the United States and Iran—and weakening employment created downward pressure on the stock market. Kim pointed out, “If protracted negotiations between the U.S. and Iran continue to push oil prices higher, we should be alert to the possibility that employment weakening and inflation may occur at the same time, shifting the market’s focus to concerns about stagflation.”

This content was produced with the assistance of AI translation services.