Posted on 10/16/2009 8:00:56 AM PDT by SeekAndFind
Stocks are up. Jobs are down. So if you're an investor you're enjoying a vibrant recovery and if you're a worker it still feels like a grinding recession.
Since bottoming out in March, the stock market has soared by about 60 percent, one of the most awesome rallies in market history. The Dow Jones Industrial Average cracking 10,000 may not be strategically significant, but it's a psychological breakthrough that's worth cheering after the demoralizing crash that preceded it.
While the Dow has been racing upward, however, the unemployment rate has also skyrocketed, from 8.5 percent in March to 9.8 percent now. The economy has lost 7.2 million jobs since the recession began at the end of 2007, and the trend is still going the wrong way. The unemployment rate will almost certainly hit 10 percent and hover near there for awhile in 2010, before gradually declining.
So are job losses good for the stock market? Actually, yes. At least for awhile. Stocks are rising because many companies are earning more money than analysts have expected. But earnings aren't up because companies are selling more stuff; most companies are still selling less stuff and grappling with falling revenue. Instead, earnings are rising because companies have cut their costs more than revenues have fallen. And "costs" are often the same as "jobs." Consider these snippets from some recent earnings reports:
Johnson & Johnson. Third-quarter revenue was down 5.3 percent but net earnings rose 1.1 percent.
Domino's Pizza. Third-quarter revenue down 6 percent; net earnings up 77 percent.
Abbott Labs. Third-quarter revenue up 3.5 percent; net earnings up 36.5 percent.
Pepsi. Third-quarter revenue down 1.5 percent; net earnings up 9.5 percent.
Alcoa. Third-quarter revenue up 9 percent, compared with the second quarter; net earnings swung from a $459 million loss to a $124 million profit.
All of those companies have laid off workers over the last two years, probably necessary to keep the company healthy. And it's worth keeping in mind that when earnings outperform revenue, it's a sign that the company is well-run (assuming there's no Enron-style hocus-pocus). But CEOs also know that you can't grow a company or keep juicing the stock price by cutting costs and slashing jobs. Real growth only comes from new customers, new business, and increased revenue. And on that measure, the outlook is murky for the stock and job markets both.
The same workers who have been getting laid off, improving the cost profile for many companies, are also consumers running out of money to spend. Some are going bankrupt, defaulting on bank loans, and losing their homes. That's a major risk to corporate profits—and stock prices—down the road.
Some companies will be able to coast for awhile. The weak dollar and relatively strong economies in Asia and parts of Europe and South America, for example, are good news for U.S. exporters, since it helps them offset weak U.S. sales with stronger business overseas. And more-efficient companies can withstand lean times longer. But most American companies still rely on American consumers to keep business humming. Sooner or later, the U.S. job and stock markets need to go in the same direction.
The question is whether the job market will hitch onto the coattails of the stock market, with companies starting to hire as their fortunes improve—or stocks will turn south as the ranks of the unemployed swell. Good thing workers and investors both have become familiar with uncertainty.
Wall St. likes a streamlined work force.
From the accounting view of that question: Jobs are expenses and expenses cut into margin, thus decreasing profits. Increased profits mean that the stock price increases.
it was a crime against humanity when GWB was president. it must be okay now.
Down today!
Here’s what those people who are always screaming “tax the corporations more! They can afford it!” don’t understand.
Almost every corporation can find someone to cut to save their profits. More than likely, it’ll include those with a sense of entitlement vs. those with the work ethic.
“Why Stocks Are Surging as Jobs Disappear (Dow is up, Jobs are down, what gives ?)”
*********************
And nobody is suspicious....
No wonder a pvunk like hussein can rise to stardom!
Simple really, a company is not just going to bend over and say ‘oh well, I guess we’ll fail’. No, they modify their business plan to work within the conditions they play. They streamline workforces, reduce expenses, and change product focus.
If you owned a video store, for example, and the market started crashing, you wouldn’t just bend over and take it? You would look for ways to save money. You would possibly change price structures to meet the customer’s economic circumstances, etc. You would still look for a way to make a profit.
This is one of the reasons why I’m not a complete doomer on the future of the economy. As long as there are still sectors that big brother doesn’t get his nose in much more, and they can attempt to make a profit, they will modify behavior in order to maintain profitability.
Part of it is inflation, but it is mostly that investors do not have any other place to go to try to make money with the kind of liquidity that the stock market has.
There is no “real” value in the stock prices. They are vulnerable to a deep crash. I’m about ready to move my 401K to safer ground.
Where did all those TARP and STIMULUS dollars go?
A not-so-Merry Christmas is on the horizon.
There will be lots of breast beating and face reddening before it’s over. But no one at this point will be very surprised.
From an accounting standpoint, yes. They always have been.
Uhhhh, because the government printed up and doled out trillions of dollars from the taxpayer's treasury to Wall Street after they were absurdly permitted to call themselves "banks".
Where did all those TARP and STIMULUS dollars go?
>>
Much of it went to off-shore bank accounts. I beleive.
same questions were asked prior to the 29 crash.
By December 2008 I think there was a general fear that there the potential for an historic collapse of the U.S. and world economic system. That was a reasonable fear that was, IMHO, promoted by the media and the incoming Obama Administration in order to provide a basis for the pork-laden Stimulus Bill. By January my personal view and I think the financial markets view was that it was going to be bad but that the sky was, in fact, not falling. The Stock market had fallen too far and too fast. So a correction was inevitable. If you recognized that fact in that time-frame and acted on that belief you made out like a bandit. I suspect many of Obama's closest friends did so.
With the wage czar deciding what people can earn, expect some of our most ambitious people to seek their fortunes in freer markets around the world. The next Bill Gates has probably made up his mind, “not here.”
Exactly! Wall Street can point to companies and say “they’re lean” and “they cut overhead”. Another factor is low inflation. I suspect one reason inflation hasn’t taken off - yet - is because of the high unemployment.
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