Is Good News Really Bad News


March, 2015

You may have read last week that the U.S. stock market took a tumble based on what would seem like really good news: that the U.S. unemployment rate is falling faster than anybody expected. If you’re scratching your head, you’re not alone.

First, let’s focus on the good news and what it may mean. At the beginning of 2015, there were 3 million more Americans at work than the year before. The unemployment rate had fallen to 5.5%—a level that economists at the International Monetary Fund had projected that the U.S. wouldn’t achieve until 2018 at the earliest. 

Then came the U.S. Bureau of Labor Statistics report for February, which showed a seasonally-adjusted increase of 295,000 jobs (nonfarm payroll employment), well ahead of projections. As you can see from the chart, America has not only pulled out of the long unemployment slump triggered by the Great Recession; it is now creating jobs faster than at any time since 2000, roughly equal to the go-go economy of the late 1990s. The government report noted that there are 1.7 million fewer unemployed persons today than there were at this time last year. More importantly, perhaps, there are 1.1 million fewer people in the “long-term unemployed” category, which is now down to 2.7 million overall.





How can this be considered bad news for U.S. stocks? There are three possible explanations. First, the labor markets may be creeping toward that place where businesses have to compete for talent and pay their workers higher wages. When payrolls go up, it eats into corporate profits. There is little direct evidence this is happening yet—overall, wages are up just 2% in the past year, roughly even with inflation. But there are reports that small business employers have more unfilled job openings than at any time since April 2006. Meanwhile, the average workweek is inching up, which suggests that companies need people at their desks longer than they did before. 

If the unemployment rate hits 5.4%—which could happen this Spring—then our economy will have reached what Federal Reserve economists consider to be “full employment.” This, of course, does not mean what those words actually say; it is a coded way of saying that the balance of negotiating power will have started to shift from employers to workers.

Reason number two is bond rates. While stocks were tumbling last week, bond yields were moving in the opposite direction in what was described as the biggest one-day selloff since November 2013. The yields on 10-year Treasuries rose from 2.11% to 2.239% in a single day. As bonds become more competitive with stocks, demand for stocks goes down—and so do stock prices. Interestingly, the stocks with the highest dividends tended to be the biggest losers in the selloff, suggesting that some investors who were temporarily relying on stocks for income are shifting back to bonds.

But perhaps the biggest reason for the market’s angst is concern about the next move by Federal Reserve Board. Fed chairperson Janet Yellen has made it clear that the health of the U.S. labor market will factor into her decision on when to finally allow short-term interest rates to rise. The good unemployment news could accelerate that schedule; at the worst, it probably confirms the current unofficial timetable of graduated rise beginning in June. For the impact that would have, go back to reason number two.

How credible are these three concerns? Should we be worried? It’s helpful to remember that higher employment means more money in the pockets of consumers, which can trigger a virtuous circle of more spending, more corporate revenues, a healthier economy. We’ve learned from past experience that the stock market is easily spooked by shadows and headlines, by good news as well as bad news. Bond rates are still pretty low compared with historical numbers, and the possible threat of higher payrolls is not exactly the same as seeing them show up in the actual workforce. (Remember those 2.7 million long-term unemployed workers still searching for any kind of a paycheck.) 

Short-term traders, who measure their investment horizon on the second hand of their watch, can panic if they want to. Those of us who measure our investment horizon with a calendar should be celebrating another milestone in the U.S. economy’s long and fitful recovery.


Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

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This material was prepared by, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.


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