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

• Published in: The Journal of finance (New York) Vol. 60; no. 2; pp. 649 - 672
• Main Authors: BOYD, JOHN H., HU, JIAN, JAGANNATHAN, RAVI
• Format: Journal Article
• Language: English
• Published: 350 Main Street , Malden , MA 02148 , USA , and 9600 Garsington Road , Oxford OX4 2DQ , UK Blackwell Publishing 01-04-2005; Blackwell Publishers; Blackwell Publishers Inc
• Subjects: Earnings; Economic information; Economic recessions; Equity; Finance; Financial performance; Forecasting models; Government bonds; Interest rates; Macroeconomics; Proxy reporting; Rates of return; Risk premiums; Stock exchange; Stock market indices; Stock prices; Stock returns; Stocks; Studies; Unemployment; Unemployment rates; United States > US
• ISSN: 0022-1082; 1540-6261
• DOI: 10.1111/j.1540-6261.2005.00742.x

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.