words that SPEAK

by Peter Jacobs

Does a precipitous decline in the Dow Jones Industrial Average foretell vast unemployment? Alternatively, does a charging Wall Street bull assure strong employment prospects for job seekers, or instead, a buyers' market for employers? Those old enough to have survived a downturn in the economy know too well the impact such an unwelcome change can have on employment. Now, with the Dow seemingly soaring above the stratosphere, we may be given pause to wonder what it all means for job prospects and job security. (Admittedly, by the time you read this the Dow likely will have changed altitude.)

To understand the unique relationship between Wall Street and the employment market, we first need to consider what makes the stock market tick. Even casual observation reveals that the nation's economy and financial markets do not always move in tandem. This is because each responds to a unique set of factors, some of which are the same, yet often produce different results.

Moving Forces
David Wyss, research director at DRI McGraw-Hill in Lexington, tells us the stock market depends chiefly on the economy, corporate earnings, and interest rates. The market is always trying to forecast what is going to happen with the economy, he said. It doesn’t react to what the economy is doing now, but to what it expects it to do in the future. Factors such as the national and global economic outlook, interest rate forecasts, and corporate earnings expectations can therefore cause sudden swings in stock prices depending on how the news is perceived by shareholders.

Interest rates, strongly influenced by actions of the Federal Reserve Bank, are clearly a key stock market factor. Low rates paid on bonds, deposit certificates and interest-bearing accounts spur investors to seek better returns elsewhere, typically in the equities market. The resulting influx of cash generates a buying frenzy that, in turn, drives up stock prices.

Inflation, too, plays a role in stock market dynamics. If the economy is doing well, said Wyss, and inflation heads up, it can put a damper on the stock market. Higher prices typically mean lower sales and earnings for corporations, and consequently, less hiring.

William Casey, professor of economics at Babson College, concurred. He added that, Obviously, a bear market has the opposite effect. People tend to save more for precautionary reasons, and this would have a negative affect on income generation and unemployment. A sustained bull market, like we’ve had, he said, produces more of a spending orientation. It creates a propensity to spend, and that drives the economy, and employment follows.

It’s not only the direct effect, said Casey. I’d say there’s a psychological affect as well. When the stock market does well it creates optimism. That, by itself, produces a spending orientation that drives the economy. So first, there’s the real wealth affect where people spend more simply because the value of their assets has grown. Secondly, I think there’s a psychological expectations affect that also drives spending, income generation, and employment.

Wall Street’s sensitivity to news and hearsay, coupled with its ongoing effort to predict economic change, often causes the market to move out of synch with the economy.Usually the market turns before the economy, said Wyss, so the market turns bearish before, not after a recession. This is not always the case, but in general. Markets tend to move out of tandem, for example, during a high-inflation recovery such as we experienced in the late ’70s and early ’80s when the economy came back fairly strongly, but the market remained in the doldrums. In most cases where the market was doing well and the economy poorly, said Wyss, the market was forecasting the economy and doing a pretty good job of it.

Net Results
Once we understand the economy’s relationship with Wall Street and the factors that influence each, we can ask what it all means for job seekers, employers, and recruiters. From a broad perspective, we know that financial markets react to factors differently than does the economy, and their response can be exceedingly rapid. We also know that stock market trends generally are an indicator of investor expectations concerning the economy. Because economic performance and employment tend to move in tandem, stock market turns may then also be viewed as an effort to forecast the national job market.

The Massachusetts job market is also affected by the performance of its leading industries: financial services, technology, healthcare, and education. Hiring in non-bank financial services--primarily investment management firms--is clearly closely tied to stock market performance. A recent report by the Federal Reserve Bank states investment management firms in New England claimed substantial increases in assets under management in the first four months of the year, although inflows have slowed slightly from a year ago.

Healthcare and education are much less sensitive to either financial market or economic changes because consumers tend to view them as essential. Said Casey, Parents today invest long-term in their children’s education and consider it very important. I don’t think people will see short-term market turns as influencing their decisions to invest in intellectual capital. The technology industry, by contrast, is sensitive to product innovations and economic conditions, as well as to stock market fluctuations.

According to Casey, The (stock) market represents an opportunity for companies to finance new ventures. Companies are anxious to have their earnings look good and their future look promising so that Wall Street rewards them. Therefore, they are able to float new capital, and through growth, employ more people. Does this mean that a seller’s market will lead to retrenchment? In some cases, yes, he said. Sometimes companies are forced to disinvest, and that might involve layoffs or plant closings.

Overall, the region’s job outlook, like that of the stock market itself, remains promising. The New England Economic Project, a non-profit forecasting group, expects regional employment to expand 2.0 percent this year, plus 1.2 percent and 1.4 percent in the succeeding two years, according to their latest report. Unemployment in the region, NEEP anticipates, will remain in the 4.3 to 4.5 percent range for the next several years.

Mark Smith, managing director at the Boston office of Korn/Ferry International, a leading executive recruiting firm, reports that recruiting has been strong and robust for the last few years. There has been a lot of activity across all of the major market segments, he stated. Highly trained and skilled people are being actively sought, making them increasingly difficult to find. Employers are becoming more aggressive in seeking people, and compensation is being driven up. Candidates are getting multiple offers in many cases. They are therefore able to be selective and use leverage with employers.

Let’s hope the predictive prowess of Wall Street’s raging bull is, indeed, on target!