Wall Street is awaiting a potentially impactful U.S. nonfarm payrolls report, with some investors betting that bad economic news could translate into good news for the stock market. As the U.S. job market is in what some economists call a "low hiring, low firing" environment, expectations for January's nonfarm payroll data are low. Besides weak employment growth, economists also anticipate that Wednesday's report may include downward revisions, suggesting hiring slowed more severely than previously thought.
In recent months, the job market has remained a key focus for traders, even as the S&P 500 index repeatedly hit new highs. Data from Goldman Sachs shows that last year, investors reacted increasingly negatively to companies announcing layoffs, even when the stated motives were efficiency improvements or restructuring. In recent weeks, shares of companies like Amazon, Home Depot, and Pinterest fell after they announced job cuts.
However, according to veteran strategist Jim Paulsen, historical patterns suggest that a deteriorating employment situation could actually benefit the broader stock market. This is because investors often interpret weak jobs data as a signal that the Federal Reserve will support the economy by cutting interest rates—a move widely anticipated on Wall Street this year. Paulsen wrote, "Once policy stimulus is in place, regardless of whether the economy ultimately enters a recession, the stock market begins to focus on economic recovery, and investors start pushing stock prices higher."
Paulsen's data indicates that since 1948, including the present, there have been 14 instances during economic expansions when the seasonally adjusted annual nonfarm payroll growth rate slowed to around 0.37% or lower. In 11 of those cases, it proved to be a good time to buy stocks, with the S&P 500 rising an average of about 13% annually, while employment growth ranged between 0% and 1%.
Paulsen noted one caveat: the S&P 500 is currently hovering near record highs, whereas many past labor market slowdowns occurred after stocks had sold off due to economic concerns. Brian Nick, Head of Portfolio Strategy at Newedge Wealth, said, "Problems could also arise if the U.S. economy disappoints and companies are unable to maintain profit margins. This could lead investors to shift towards a risk-off sentiment, and at the same time, companies may also cut jobs."
A report from Goldman Sachs suggests that despite the strong overall market performance, some cautious sentiment may already be emerging. According to the report released late last year, shares of companies that recently announced layoffs underperformed the bank's technical model forecasts by an average of 2%. Companies that cited restructuring as the reason for cuts were hit even harder, with their shares falling an average of 7%.
Goldman Sachs economist Elsie Peng stated that these moves deviate from historical trends. Bank data shows that in the past, layoffs motivated by efficiency improvements typically boosted stock prices, while cuts linked to deteriorating fundamentals led to underperformance. Peng believes this shift indicates that investors are now interpreting layoffs as a response to financial pressure, even when companies provide more benign reasons. She wrote, "Despite the seemingly harmless reasons given, the stock market has interpreted recent layoff announcements as a negative signal for these companies' outlooks."
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