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Is Wall Street Closer to Main Street Than we Thought?

Reuters' Felix Salmon has a pretty striking graph comparing the path of the stock market and the trends in unemployment:

sp-vs-u6.gif

"It seems that the two indicators are much more coincident than you might think," he says. I believe that's the literary device commonly known as "understatement." A quick glance at the graph suggests that they're tightly tied. But stocks move faster than unemployment. The market drops a bit before the heavy layoffs begin. And so the question, for those invested in green shoots, is whether the opposite holds true. Stocks have begun to rise again. But it's not necessarily the case that unemployment will quickly follow.

It could be that the fall in the stock market coincides with factors that also reduced employment -- a dawning recognition of the indebtedness of the American consumer, say. But the return of the stock market might not be tied to the return of low unemployment. If investors are sensing that companies are undervalued, but companies aren't sensing that consumers can spend again, you might see investors buying for the long-term even as employers wait to fill out their payrolls.

By Ezra Klein  |  May 26, 2009; 1:00 PM ET
Categories:  Financial Crisis  
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Comments

Right Ezra. As you know, that is why it is nice to put a theory like this through a battery of econometric tests. The causation could well go the other way--or from third factors such as falling growth, or pessimism about near-term growth, affecting both stock prices and unemployment.

Posted by: Castorp1 | May 26, 2009 1:32 PM | Report abuse

Causation doesn't go in either direction in this case. The events causing both the weakness in employment and the stock market are broadly understood to be 3rd party events.

A financial crisis caused both spikes.

Other than as indicators of whether a major crisis occurred, it's not clear that there is a meaningful correlation at all. '06 to 07 saw +20% stock market gains, with unchanged to slightly negative employment.

The idea this short-term graphic unveils some lasting proof of a greater correlation between these 2 factors is far-fetched. Salmon's article has a lot more disclaiming text that is stripped out here.

Posted by: sullivanmatthewr | May 26, 2009 2:06 PM | Report abuse

The graph is treating "underemployment" not "unemployment". I don't think it changes your argument much, but there are more causal factors at work in underemployment than just layoffs.

Posted by: flory | May 26, 2009 2:54 PM | Report abuse

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=117070&t=01004553487438585767

Clearly, there is no historical relationship linking unemployment and S&P 500, but there is a relationship between unemployment, S&P 500 and when recessions end.

"tightly tied"?

I expect better than this from you, Mr. Klein.

Posted by: member5 | May 26, 2009 2:54 PM | Report abuse

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