pected earnings; but if interest rates decline, stock prices could possibly
move up because of the decline in the rate at which these profits are dis-
counted. It is a struggle, in asset pricing terms, between the numerator,
which contains future cash flows, and the denominator, which discounts
those cash flows.
Which effect is stronger—the change in the interest rate or the
change in corporate profits—depends often on where the economy is in
the business cycle. Recent analysis shows that in a recession, a stronger-
than-expected economic report increases stock prices since the implica-
tions for corporate profits are considered more important than the
change in interest rates at this stage in the business cycle.^2 Inversely, a
weaker-than-expected report depresses stock prices. During economic
expansions, and particularly toward the end of an expansion, the inter-
est rate effect is usually stronger since inflation is more of a threat.
Many stock traders look at the movements in the bond market to
guide their trading. This is particularly true of portfolio managers who
actively apportion their portfolio between stocks and bonds on the basis
of changes in interest rates and expected stock returns. When interest
rates fall after a weak economic report, these investors are immediately
ready to increase the proportion of stocks that they hold since the rela-
tive returns on stocks or bonds have, at that moment, turned in favor of
stocks. On the other hand, investors who recognize that the weak em-
ployment report means lower future earnings may sell stocks. The stock
market often gyrates throughout the day as investors digest the implica-
tions of the data for stock earnings and interest rates.THE EMPLOYMENT REPORT
Theemployment report, compiled by the Bureau of Labor Statistics (BLS),
is the single most important data report released by the government
each month. To measure employment, the BLS does two entirely differ-
ent surveys, one that measures employment and the other that measures
unemployment. The payroll surveycounts the total number of jobsthat
companies have on their payrolls, while the household surveycounts the
number of peoplewho are looking for jobs. The payroll survey, some-
times called the establishment survey, collects payroll data from nearly
400,000 business establishments, covering nearly 50 million workers,CHAPTER 14 Stocks, Bonds, and the Flow of Economic Data 241
(^2) See John Boyd, Jian Hu, and Ravi Jagannathan, “The Stock Market’s Reaction to Unemployment
News: Why Bad News Is Usually Good for Stocks,” National Bureau of Economic Research (NBER)
Working Paper No. W8092, NBER, Cambridge, Mass., January 2001.