Mark B at the SMI Weblog (subscription required) notes an interesting phenomenon that most people are probably not aware: the equity market can be a hedge against personal ability devaluation.

As with the bones of the body, the financial markets are similarly connected. Understanding those connections can help us see how certain changes and news events often affect stock and bond prices.

For example, today's stock market losses are a reasonably clear reaction to the stronger than expected jobs report released this morning. Why would a good jobs report send the stock market lower? Because strong growth in jobs can lead to a tighter labor market. Tight labor markets lead to higher wages, which is inflationary. And inflation is generally thought to be bad for stocks.

The connections don't stop there. Higher potential inflation is also the bane of the bond market. So today's jobs report makes it more likely that the Fed will raise interest rates higher/longer, and has already caused the bond market to send long-term rates higher (pushing bond prices lower in the process). Since mortgage rates largely follow the rates of longer-term bonds, today's good job news may turn out to be bad news for mortgage shoppers. Which of course wouldn't be good news for the housing market.

So as unemployment goes down, wages go up, which means that the value of each worker's personal ability goes up; in reaction, stock prices go down. This isn't rocket science, but it's interesting that equity and salary can be inversely related (across the economy as a whole).



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