A sustained, fundamentally-driven stock market rally is generally good for job creation. … [+]
Inflation slowed in May, raising hopes of an interest rate cut by the Federal Reserve, a positive sign for the U.S. economy. The upbeat inflation figure sent stock markets soaring following last week’s inflation report, with Wall Street experts raising their year-end targets for major indexes, including the S&P 500.
The latest data from the Bureau of Labor Statistics showed the core consumer price index, which excludes volatile food and energy prices, rose just 0.2% from the previous month in May, the slowest increase since October 2023.
The core producer price index, which measures the average change in the selling price domestic producers receive for their produce, was flat, below expectations.
Economists see the data as a positive indicator for the Fed’s core personal consumption expenditures index, a key inflation gauge, due to be released later this month.
Bank of America expects core PCE to rise just 0.16% in May, reinforcing its view that “disinflation remains the most likely path forward.”
Citing favorable inflation trends and the “nascent stages” of artificial intelligence, Evercore ISI strategist Julian Emanuel raised his year-end target for the S&P 500. Emanuel’s new S&P 500 target is a Wall Street high of 6,000.
Last week, the S&P 500 and Nasdaq hit record highs for the fourth straight week as investors cheered declining inflation measures in the Consumer Price Index and Wholesale Price Index.
Jonathan Golub, chief U.S. equity strategist at UBS, who has a price target of 5,600 for the S&P 500, said the inflation data raises “potential for even bigger upside” in the year-end outlook, according to Yahoo Finance.
Investor confidence, the wealth effect, and employment
A strong and vibrant stock market can affect the job market in contrasting ways. On the positive side, a strong stock market tends to increase investor confidence. This increased optimism may motivate businesses to increase investment and potentially expand their workforce by hiring additional employees.
A sustained, fundamentally-driven stock market rally signals economic strength and provides businesses with the resources to expand, which is generally positive for job creation, promotions, and pay raises.
When stock prices are trending upwards, it has a positive impact on the wealth of individuals who are invested in stocks, whether through direct stock ownership or indirectly through retirement accounts.
This accumulation of personal assets fosters a sense of financial well-being and confidence among individuals, encouraging them to loosen their purse strings and allocate a larger portion of their disposable income for discretionary spending.
This surge in consumer spending will act as a catalyst, boosting economic activity across various sectors. As consumer demand for goods and services increases, businesses will respond by expanding their operations, potentially leading to the creation of new job opportunities to meet the growing demand.
Strong stock market negative impact
A booming stock market signals a thriving economy, but it can also raise concerns about inflationary pressures. In such a scenario, the Fed could step in with measures to cool an overheating economy.
One of the main tools available to the US central bank is adjusting interest rates. To combat potential inflationary risks, the Fed may choose to raise interest rates, a move intended to cool the economy by making borrowing more expensive for both consumers and businesses.
For businesses, rising interest rates translate into increased costs associated with obtaining loans and accessing lines of credit. This financial burden may discourage business expansion, investing in new projects, or hiring additional personnel. This could result in a slowdown in the pace of job growth and, in some cases, lead businesses to resort to layoffs to maintain profitability and financial stability.
A focus on short-term stock market performance can lead companies to prioritize stock buybacks and dividends over long-term investments that create jobs. Rising stock prices can exacerbate wealth inequality: when only a small percentage of the population owns stocks, the benefits of a good economy are concentrated in the hands of the wealthy.
Why is it complicated?
A bull market in the stock market can be a good sign for the job market, but it is not a reliable predictor. A true economic boom with strong fundamentals is more likely to lead to sustainable job growth than a speculative bubble that will eventually burst. A boom in a particular sector may create jobs in that area, but it does not necessarily lead to broad-based job growth throughout the economy.
