The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks

Abstract

We find that on average, an announcement of rising unemployment is good news for stocks during economic expansions and bad news during economic contractions. Unemployment news bundles three types of primitive information relevant for valuing stocks: information about future interest rates, the equity risk premium, and corporate earnings and dividends. The nature of the information bundle, and hence the relative importance of the three effects, changes over time depending on the state of the economy. For stocks as a group, information about interest rates dominates during expansions and information about future corporate dividends dominates during contractions. Copyright 2005 by The American Finance Association.

The reaction of the WSE to U.S. employment news announcements

“…traditionally bad information have a negative impact on European markets during contractions but the effect is positive while expansions. This is in line with the previous results of Boyd et al [4] who study the impact of the U.S. Unemployment Rate announcements on S&P500 stock index in the period from February 1948 to December 2000. Boyd et al discover that during contractions average stock returns are positive on the day when "good" news is announced and negative on the day of "bad" news.…”

Responses of the Warsaw Stock Exchange to the U.S. Macroeconomic Data Announcements

“…The latter interpretation is in line with a theory presented by Boyd et al [6] that an announcement about rising unemployment contains simultaneously some positive and negative information. The lack of significant reaction in the event day and generally insignificant price and trading volume changes the day after can also suggest uncertainty of investors on the WSE who wait for more information or reaction of investors in the U.S. and Asia.…”

Stock market reaction to fed funds rate surprises: State dependence and the financial crisis

“…The main difference between the OLS and MM results is that in the latter the coefficient of FFR surprises during the crisis period becomes statistically significant thereby implying a more 12 Furthermore, the stock market itself may be reacting to the employment data releases (see e.g. Boyd et al, 2005). …”