Why a strong jobs report sometimes makes markets fall

HostIt's one of those things that just doesn't seem to make sense when you hear it on the news. You wake up and find out that tons of people found new jobs last month, and you think that's great news for the country. But then you look at the stock market an hour later and everything is crashing. It feels like the whole world is upside down. Why does the stock market seem to hate it when regular people find a way to make a living?

GuestIt feels backwards because we're looking at two different goals. For most of us, a job is about a paycheck and being able to buy what we need. But for the people who trade stocks, a jobs report is a look at how fast the whole engine is running. Think of the economy like a car. If it goes too slow, it stalls out and people lose their homes. But if it goes too fast, the engine starts to overheat. That heat is what we call inflation, which is just a fancy way of saying the price of everything from eggs to gas starts to climb way too fast. When a jobs report comes out and it's really strong, the big players in the market don't see happy families. They see an engine that's about to blow up. They get scared that the people in charge of the money, the central bank, will have to slam on the brakes to cool things down.

HostThe central bank being the ones who set how much it costs to borrow money.

GuestRight. Their main tool is changing interest rates. When they raise those rates, it gets more expensive for you to get a loan for a car or for a company to build a new factory. If the jobs report is too good, the market thinks those higher rates are coming next week. So they start selling their stocks right now to get ahead of it. Higher costs for borrowing mean less profit for companies down the road. It's a bit like a tax on the future. If a company has to spend more to pay back its loans, it has less money to grow. Investors see that coming and they run for the exit before the bad news even hits.

HostBut that feels like the market is actually punishing success. Are you saying that for the stock market to move up, we actually need some people to stay out of work? That sounds pretty cold.

GuestIt's not that they want people to be out of work, but they're terrified of something called a wage price spiral. Imagine a world where every boss is desperate to hire because business is booming. To get you to come work for them, they offer you a huge raise. That sounds amazing for you. But then that boss has to pay for your raise, so they mark up the price of the shirts or the tools they sell. Now, because those things cost more, you and everyone else need even higher pay just to keep up. It's a loop that can spin out of control until a dollar doesn't buy much of anything anymore. The market is looking for a middle ground. They want just enough jobs to keep the lights on, but not so many that it kicks off that cycle of rising prices.

HostSo we're basically rooting for the news to be just okay? Not too good, not too bad?

GuestExactly. People call it the Goldilocks zone. If the report shows that some people got jobs but not so many that it'll make the bankers jumpy, the market stays calm. But there's another layer to this. It's about what people were expecting to see. The stock market is like a crowd at a movie. If everyone already knows how the movie ends, they don't jump when the monster appears. If the big traders all guessed that the economy was going to add two hundred thousand jobs, and the report says exactly that, the market might not move at all. But if the report says five hundred thousand people got jobs, it's a total shock. That surprise is what causes the big red numbers on the screen.

HostI have seen times where the jobs report is strong and the market actually goes up, though. Is everyone just making it up as they go?

GuestIt depends on which monster is scarier that day. Sometimes, people are worried that the country is headed for a deep slump where nobody has money. In that case, a strong jobs report is like a sign of life. It tells investors that the ground isn't falling out from under them. So they celebrate. But lately, we have been more worried about prices going up than about the economy slowing down. When the main fear is inflation, good news for workers is almost always seen as bad news for stocks. It's a game of trying to guess what the central bank is thinking, while the central bank is trying to guess what the workers are going to do.

HostIt sounds like a lot of over thinking from people with way too much money on the line.

GuestIt's almost nothing but over thinking. You have thousands of people with very fast computers trying to predict a future that hasn't happened yet based on a report about what happened last month. They're reacting to a shadow of the past. The most wild part is that the actual health of the companies might be fine, but the fear of what the bank might do is enough to send the whole thing into a tailspin. We're all just watching a giant game of chicken between the people who set the rates and the people who do the hiring.

HostThe biggest mystery left is whether we can ever really find that perfect balance where everyone has a paycheck and the prices of eggs stays the same.

GuestThat sea of red on the news shows that even when everyone gets a job, the people holding the money are already looking for the next reason to hit the brakes.