Why do unemployment rates and stock market indexes both go up?
During the recovery from the 1990’s recession, a lot of outrage was aimed at the fact that when a company announced lay-offs the stock market indexes went up; this appears to be a trend we have seen recently. But, if rising unemployment rates are a bad thing for the economy, why are stock indexes going up? At its very core, unemployment rates and stock market indexes are lagging and leading economic indicators respectively. A lagging economic indicator is a snapshot of the past and may not be necessarily reflective of the here and now. For example, businesses tend to engage in massive lay-offs after the financial results are in for the previous quarter; management may have a feeling it is doing properly but until the bean-counters consolidate the financial statements, it is a feeling only. Thus, a lagging indicator tends to merely validate past events. A leading economic indicator estimates future economic activity. Stock indexes are basically a measure of future expectation of profit.
