The Stock Market's Reaction to Unemployment News, Stock-Bond Return Correlations, and the State of the Economy
Journal of Investment Management, Vol. 4, No. 4, Fourth Quarter 2006
Posted: 29 Nov 2006
We confirmBoyd et al.'s (2005) finding that on average a surprise increase in unemployment is "good news" for stocks during economic expansions and "bad news" during economic contractions. Unemployment news bundles information about future interest rates, equity risk premium, and corporate earnings. For stocks as a group information about interest rates dominates during expansions, and information about future earnings dominates during contractions. Hence, (a) ceteris paribus, the correlation between stock and bond returns will be greater during economic expansions and (b) stock price responses to the unemployment news will convey information about the state of the economy.
Keywords: Stock-bond correlation, unemployment news, stock market reaction, information in macroeconomic announcements, state of the economy
Suggested Citation: Suggested Citation