THE STOCK MARKET’S REACTION TO UNEMPLOYMENT NEWS, STOCK-BOND RETURN CORRELATIONS, AND THE STATE OF THE ECONOMY

John H. Boyd, Ravi Jagannathan and Qianqiu Liu

We confirm Boyd et al.’s (2005) finding that on average a surprise increase in unemployment is “good news” for stocks during economic expansions and “bad news” during economic contractions. Unemployment news bundles information about future interest rates, equity risk premium, and corporate earnings. For stocks as a group information about interest rates dominates during expansions, and information about future earnings dominates during contractions. Hence, (a) ceteris paribus, the correlation between stock and bond returns will be greater during economic expansions and (b) stock price responses to the unemployment news will convey information about the state of the economy.