Wall Street Finds Good News

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Often, good news on Main Street is bad news on Wall Street.  A strong jobs report at a time when the Federal Reserve is considering doing less to help the economy will often spook equity markets, leading to a sell-off that lowers stock prices and increases bond yields.

I thought that Friday’s better-than-expected jobs report would have had that effect, especially given that the Fed has been quite clear that it is in data-driven mode.  The better the numbers look, the more likely it will begin to taper â€" slow its asset purchases â€" sooner rather than later.  A few weeks ago, even the hint of a taper sent equities reeling and bond rates spiking.  Yet on Friday, the Dow Jones industrial average rose almost 200 points (1.26 percent).  What’s changed?

I think the answer is twofold.  First, investors and traders are finally recognizing the inevitable: At some point, the Fed will slow the rate at which it is expanding its balance sheet.  But as Fed representatives have been stressing, tapering isn’t tightening, and the Fed is not jumping out of the monetary stimulus business.  Yes, there will come a time when the central bank unwinds its balance sheet, and there will even come a day when it raises rates again.  But such actions most likely remain some time off.

The fact that market participants passed this reality check on Friday strikes me as a good thing and a sign that the Fed has effectively communicated its intentions.

Second, markets seemed to recognize another simple truth on Friday: Sometimes good news is just that … good news.

Payrolls added about 200,000 jobs over each of the last two months.  But if you average their gains over the 11 months of this year so far, you get about 190,000 per month.  That’s the underlying trend of payroll growth, and it’s a solid number.  If it persists, and that’s the expectation, it’s a pace of job growth that will steadily lead to lower unemployment.

Certainly, significant problems remain, including historically high long-term unemployment and historically low labor force participation.  Job quality is a real concern, especially among lower- and middle-wage workers.  And let’s face it: This recovery has delivered a number of false alarms regarding truly improved conditions.  We have too often seen economic “green shoots” through rose-colored glasses.  As I wrote on Friday morning, let’s not conflate an improving job market with a healed job market.

So we’re not out of the woods, but we appear to be on the path that leads in that direction and may be heading down that path a bit quicker than we thought, and markets reacted positively to that today.

Now, one definitely doesn’t want to read too much into a monthly jobs report and even less so, a day’s reaction in the markets.  I don’t spend a lot of time trying to figure out what drives markets day to day, and I suggest you don’t either.

But at the end of the day, markets need growth just as households need growth.  Main Street and Wall Street often seem impossibly far apart, and there’s more distance than ever between the incomes of those at the top of the scale and the rest.  But at least for one day, good news in the job market was received as good news in financial markets.  I didn’t expect that â€" the fact that this is so rare is a symptom of what ails us. But I was glad to see it.