The stock market reflects not only the health of the economy but also the confidence that investors and corporations have in the future of the market and the country’s practices.
Even though the strength of the stock market does impact the job market, it’s often not a direct, one-to-one correlation.
If shareholders believe that a company is going to make more profits, then the stock price will bounce back and the organization will have more resources to expand and hire employees.
If the market feels that a company’s earnings will remain stagnant or decline, then the stock price will drop and the organization will likely have work on cutting costs and surviving through the negative sentiments.
As such, the circular logic to this lies in how investors evaluate the economy. This will directly impact corporations’ resource allocation and hiring decisions.
Be mindful of the fact that the stock market is a leading indicator while the job market is a lagging indicator towards any probable change in a corporation. A single, one-off fluctuation in the stock market is unlikely to impact the job market significantly in the short run.
But when you look at an event like the Great Depression in 2008, you’ll see that it brought upon structural unemployment. This is long-lasting unemployment that comes about due to fundamental shifts in an economy.
The Great Recession that followed the 2008 financial crisis is often cited in this category of unemployment as it permanently destroyed certain jobs in some sectors of the economy.
How Investing In Your Employees Raises Company Stock Value
The major movers and shakers in the global economies – like hedge funds, pension funds, and major banks like JPMorgan Chase and Credit Suisse –understand that the global and U.S. economy has switched from a goods-based economy to a services-based economy. In fact, about 70% of the U.S. economy is based on services. As a result, the material portion of most companies, and as a result the U.S. economy, is based on selling services.
Investors understand that the people in the company are what truly makes the difference in bringing value to the table. The ideas generated, execution of ideas, and awesome customer service, stakeholder management make a company a good investment. As a result, there is a stock ratio called price to book ratio, which divides the price of the stock by the book value. So, any value above one shows that the investors think there is more potential.
One major reason that a bull market typically creates more jobs is the increased M&A activities. Larger companies have more cash and tend to expand more aggressively. On the other hand, M&A activities tend to slow down in a sustained bear market.
This is where people play a tremendous part in the stock value!
Investors should look beyond quarterly reports.
Unilever’s CEO Paul Polman stopped reporting quarterly earnings to allow the company (and its investors) to focus on long-term value. Similarly, boards of directors should give managers equity with long vesting periods, rather than deciding their bonuses or whether to retain or fire them based on short-term profit.
While the market is good at valuing tangible assets, such as profits and dividends, it is very slow at valuing intangibles such as employee satisfaction.
The market’s gradual reaction to employee satisfaction implies that while investing in employee satisfaction does pay off, it takes the market a long time to recognize its benefits.
