Sunday, December 19, 2004


Huh? (Motley Fool edition)

Today's featured article in Yahoo Finance is from the Motley Fool:

It's odd, but the stock market often tanks when there's good economic news reported. That might not make sense to you, but there's an explanation. It's all related to interest rates. Alan Greenspan and his buddies at the Federal Reserve set interest rates, trying to keep inflation at bay and promote a healthy economic environment. When positive economic news is released, such as lower unemployment figures, rising wages, or growing national productivity, the specter of possible inflation is raised. Economies growing too quickly can spur inflation, with too much currency in the marketplace leading to the weakening of the dollar and rising prices.
What's odd is that anyone actually pays money to read this stuff. First of all, growing national productivity is always deflationary (if firms can produce goods more cheaply, prices will fall, not rise). Second, what's good for America is not necessarily good for the stock market, or vice versa. Higher wages are good for workers. But higher wages also mean higher costs for firms and hence, lower earnings. Whether that's "good news" or "bad news" depends very much on which side your bread is buttered. Third, as this NBER study shows, good employment news tends to be bad for stocks only when the economy is close to full capacity and the labor market is tight. That's when there is a real threat of inflation. The labor market is not tight now: payroll employment is down more than a million from where it was 4 years ago and the average time it takes someone to find a new job is the longest in over 20 years. Perhaps that's why when the October jobs data came in lower than expected, stocks sold off.

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