Wednesday, October 07, 2009

Stock Market grows with Unemployment Numbers

The United States have seen monthly increases in unemployment of hundreds of thousands of people each month for several months in 2009. In fact, the US has experienced the largest increase in unemployment in a quarter of a century. What was Wall Street's response? A remarkable increase in the growth of the stock market numbers. In fact, in March of this year the market had plummeted to just above 6,000 and has gained approximately 80 percent of that since that time.

There is a clear divide between the short term interests of the public and business in general and an even bigger gap between the average person and Wall Street. The latter is all about profits and bottom lines. They could not be happier about the Draconian steps being taken by businesses these past months for several reasons:

  • When economic environments get to this point, there is nothing that Wall Street desires more than action. Often "retreat" (cutting costs and employees) is one of the most attractive actions in the eyes of investors.

  • There is no quicker way to cut costs than to cut employees. Employees are one of the most expensive aspects of doing business and so Wall Street is particularly excited by such cuts. The more harsh, the better.

  • Wall Street has been waiting for the market to capitulate. They have been waiting to see investors hit bottom (the DJA is now roughly half of what it was a year ago) and another indicator that the decline has plateaued is when you start to see massive layoffs. Such job losses are horrific for the recipient of the pink slip, but is great news for those who are investing in those businesses.

I don't believe the job cutting is over. Virtually every publicly owned company is going to seek ways to increase investor confidence in their companies. There is no quicker way to achieve that following a decline in profits than through layoffs. Those who have not cut yet are watching the Market's response favorably and you can expect many more to jump on board. Furthermore, many of the companies that have had layoffs also have vendor relationships that are dependent on them. As we see these companies lay people off, expect many more businesses that are dependent on them to do the same thing.

Unfortunately this ugly trend will continue, in my opinion, until there is a decidedly different approach to policy. Cutting taxes on job creators (AKA, the affluent and business owners), restoring moral hazard (e.g., allowing businesses to fail), and resisting the temptation of regulating our businesses out of existence are just a few of the steps that are needed to restore fiscal responsibility and to encourage a stable economy.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

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