How Jobless Rates Affect the Stock Market

by Geri Terzo, studioD

The jobless rate has the potential to affect the stock market in either a positive or negative way. Emotion plays into trading activity in the stock market and extreme conditions can be damaging to stocks. If an economy is booming and the jobless rate is low, investors might still sell stocks in response to fears of inflation. On the other hand, a dismal jobless situation is likely to send fear about the future of the economy through the markets. Investors tend to reward stocks when jobless data is better than economists were anticipating.

Identification

In the U.S., the number of jobless claims is unveiled weekly by the Department of Labor. The results are a reflection of stability in employment and the economy. The fewer jobless claims that are registered, the stronger the regional economy becomes, according to Barron's. A steadily growing economy has the potential to lift the stock market. When more people are employed, consumer spending is likely to rise. This leads to greater corporate profitability, which is likely to drive stock prices and investor returns higher.

Sentiment

Investor sentiment is a significant driver of stock market activity. Fear has a tendency to trigger selling activity in the markets, while investors could become euphoric about economic conditions and go on a buying spree in the stock market. A May 2011 article on the official New Jersey state website cited stronger-than-anticipated jobs data for a lift in stock prices. The jobs results, coupled with an upward trend in payrolls in the private sector, triggered greater investor confidence.

Volatility

Investors tend to shun uncertainty, and a mixed jobs report could have a volatile impact on stocks. In August 2011, investors initially cheered a slight decline in the jobless rate by sending stocks higher, according to the ABC News website. Upon further examination, however, the jobless data revealed a continued slowdown in hiring for full-time jobs, which triggered selling in the stock market. Before the end of the trading session, investors began buying once again and stocks completed this particular trading session on a high note.

Considerations

Even when corporate profits appear to be solid for reasons outside of a region's jobless rate, weak employment could still cause investors to lose confidence in the stock market. According to a 2011 article in "USA Today," quarterly corporate profits for U.S. companies in certain industries were expected to be robust because of export activity. Other economic factors, including the employment picture, were less stellar and economists predicted strong quarterly corporate profits to be overshadowed by the weaker conditions during the period.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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