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

41 Pages Posted: 19 Jan 2001 Last revised: 20 Oct 2010

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Jian Hu

Moody's Investors Service

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Date Written: January 2001

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. Thus stock prices usually increase on news of rising unemployment, since the economy is usually in an expansion phase. We provide an explanation for this phenomenon. Unemployment news bundles two primitive types of information relevant for valuing stocks: information about future interest rates and future corporate earnings and dividends. A rise in unemployment typically signals a decline in interest rates, which is good news for stocks, as well as a decline in future corporate earnings and dividends, which is bad news for stocks. The nature of the bundle -- and hence the relative importance of the two effects -- changes over time depending on the state of the economy. For stocks as a group, and in particular for cyclical stocks, information about interest rates dominates during expansions and information about future corporate earnings dominates during contractions.

Suggested Citation

Boyd, John H. and Hu, Jian and Jagannathan, Ravi, The Stock Market's Reaction to Unemployment News: Why Bad News is Usually Good for Stocks (January 2001). NBER Working Paper No. w8092. Available at SSRN: https://ssrn.com/abstract=256916

John H. Boyd (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Jian Hu

Moody's Investors Service ( email )

7 World Trade Center
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New York, NY 10007
United States
212.553.7855 (Phone)

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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