Stocks Down on Great Economic News

A prized indicator of healthy economies is job creation. This thinking believes creating new jobs is a positive action of employers growing their businesses. This supports more economic growth among suppliers, shippers and retailers of the goods and services created by the new jobs. The unemployment rate is another indicator of economic health, especially if the number is low or declining. High unemployment is a drag on the economy, but low unemployment usually means a dynamic, growing economy that will boost economic output and increase incomes. Maintaining low unemployment or pushing the rate down comes mainly from job creation. The two measures fit together nicely.

Yet, January 10th both measures improved. Yet the stock market declined substantially. What gives?

Well, investors still hope for a reduction in interest rates by the Federal Reserve Bank. Investors believe that lower interest rates will boost investments in business and their stocks. They believe that strong job growth and low unemployment will stifle investment in stocks. Hence, stock prices dropped January 10th.

But here’s the thing, the economy will benefit more from job creation and low unemployment. Employers grow new jobs in the belief that their products and services will sell in the market and earn them more money and return on investment. Most of the time that belief earns great benefits. They can be wrong, however; they can simply misread economic news and invest in a declining market, making their new jobs a drain on their net income.

Current economic news is related to the COVID challenges to the economy. Many people thought a return to a strong economy would take a lot of time. They were mostly wrong. The economy has bounced back very well. Part of the reason for this is major shifts in products and services companies adopted while their current operations and expenses were on hold due to COVID. This unique opportunity helped companies make changes to their business that resulted in dynamic increases in their operating results. Here are some of the contributing factors.

First, working from home reduced the need for office space and office buildings. Cutting space costs and developing lease income, boosted net income.

Second, operating changes adapted to new realities that saved money yet produced strong outputs. Net income rose accordingly.

Third, declining long-term demand for some of their products motivated companies to move away from those products and create new ones that advanced the company’s service to their markets and customers.

Fourth, the COVID ‘pause’ gave companies time to assess their business and markets. These efforts allowed companies to make fundamental changes to their operations and product and service offerings. The pace of change increased as a result, saving expense for the old operating processes, and advancing productivity while increasing profits from newer areas of customer service and products.

Stock prices are not an infallible indicator of economic health. The economy actually performed much better than stock market data suggests. The economy has many focal points to work with. Stock market values is only one of the many.

January 15, 2025

 

 

 

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