I've always found it perversely fascinating that in the hours and days immediately after a company announces a major layoff — destroying the financial stability and security of countless families, who often are are the company's customers — its stock price enjoys a significant uptick. U.S. News and World Report's Rick Newman recently offered a primer into why that's the case and why it can't go on forever.
Newman notes that since cratering in March, the stock market has jumped some 60%, one of the most dramatic rallies in history. He adds, however, that as the market has risen, so has the unemployment rate.
"The same workers who have been getting laid off, improving the [bottom line for many companies, are also consumers running out of money to spend. Some are going bankrupt, defaulting on bank loans, and losing their homes. That's a major risk to corporateprofits — and stock prices — down the road."
— USN&WR's Rick Newman
So, why are the two not inverse? Stocks have surged because companies are reporting stronger earnings than the market anticipated. But earnings have increased NOT because companies are doing more business; they're improving because companies have cut costs more than revenues have declined. And for most companies, costs equate to jobs.
With stock options and bonuses that often exceed their seven- or eight-digit salaries, CEOs and other executives rarely face the same economic realities as the rest of us. But the one thing they and we both understand is that you can't slash your way to prosperity. Cut as the may, executives know they ultimately must generate new business and new revenue to improve their companies' financial performance.
And on that measure, the outlook is just as worrisome for the stock market as it is for the job market, Newman concluded. "Most American companies still rely on American consumers to keep business humming. Sooner or later, the U.S. job and stock markets need to go in the same direction," he wrote.