Investors reacted to the distressing jobs report with feverish buying, by the thought that layoffs signal a preparation for higher profits and recovery

By Michael Mandel

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According to the latest employment report, released Dec. 5, jobs are disappearing allied snow in a fire. In November alone, 533,000 jobs were eliminated. And over the past three months, employment in the individual sector has dropped by 1.1%. That’s the biggest decline (BusinessWeek.com, 12/5/08) since 1980. And really, you have to bottom posterior portion to the end of the 1974-75 recession to see jobs disappearing at each even more dizzying traduce.

But here’s the paradox. Investors absorbed the horrible jobs report, and started buying—with a emotion. By the close of the Friday session, the Dow Jones industrial average had surged 259 points, added than 3%, to 8,635, while the Standard & Poor’s 500-stock index jumped 3.7%. The Nasdaq index gained 4.4%, or 64 points. Rather than treating the jobs collapse as a sign of impending depression, the mart took the more optimistic prospect that companies were sharp their workforces as every essential preliminary to higher profits and an economic recovery.

Is this split of optimism from investors warranted? It harks remote to some earlier periods, particularly in the 1990s, at the term a weak jobs number often served being of the kind which a signal beneficial to stock buying. The assumption was that high unemployment would hold down inflation, and make it easier for the Fed to cut rates.

Today, the mechanism is likely a bit many. The Fed is already entrenched in a low-rate mode, and not apt to change anytime soon. However, the ultimate size of the fiscal goad package coming in 2009 depends on how dire the economic situation appears. The more people who are touched by unemployment, the bigger the stimulus President Barack Obama is likely to propose when he takes over in January—and the easier that package will exist to move through Congress. One trillion dollars in new federal spending over the nearest couple of years, 6% or 7% of U.S. GDP, is well in the compass of the stroll of possibility. As that kicks in, it command propel both growth and accession of good opportunities for many companies.

Another comparison with earlier declines: Big drops in employment have typically come near the end of downturns, not at the beginning. For example, the long and nasty recession that started in November 1973 and ended in March 1975 had one three-month period where private-sector jobs plunged by a horrible 2.4%. But that came in late 1974 and at the opening of day 1975, when the recession was nearly over.

Will the same thing happen this time? There’s nay way to discern. But at least for seemly now, the stock market is telling us that not only so bad word can be good information.