The recent stock market plummet has sent many people into wondering if the job market will follow suit, affecting their careers and livelihoods.
The good news is, even though the health of the stock market does have an impact on the job market, it’s often not a one-to-one correlation.
The Stock Market As an Indicator of Shareholder Confidence
The stock market reflects not only the strength of the economy at the moment but also the confidence that investors and corporations have in the future of the market.
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 to tighten its belt.
As such, how investors evaluate the economy will impact corporations’ resource allocation and hiring decisions.
Keep in mind that the stock market is a leading indicator while the job market is a lagging indicator. A single fluctuation in the stock market is unlikely to impact the job market significantly in the short run.
However, if the downward trend continues in the stock market and shareholder confidence starts to erode, the job market will likely suffer since a company’s stock value is based on investors’ projection of its future earnings.
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.
Also, VC money tends to drop off in a sustained bear market, which often results in a tight market, as well as a contraction in seed and Series A rounds. This, in turn, affects the hiring prognosis for startups while more candidates are holding onto their jobs at bigger shops. Such candidate-favored market could deter smaller companies from hiring.
How the Stock Market and Job Market Affect Each Other
Many factors, such as the global economy, political climate, and investor confidence can impact how the stock market and the job market affect each other as they’re intertwined in nuanced ways.
For example, the economy doesn’t have to decline to put CEOs under pressure. If shareholders start losing confidence for any reason and executives are forced to put a hold on spending, the job market could be affected.
Alternatively, when job seekers see signs of uncertainty in the market, they’re likely to stay at their current jobs and start banking more money instead of taking more risks or increase their spending. This will reduce their disposable income, impact the economy, reduce corporate earnings, and eventually affect the stock market.
There are other factors that will affect the confidence of the market and the outlook of investors in response to a plummet in stock prices, which can have a major impact on the job market.
For example, if investors are pessimistic about the political climate and the Fed responds by increasing the interest rates, global stock and bond market will continue to drop. Companies will be under pressure to tighten their spending by pausing their hiring or even laying off employees.
However, if the political climate instills an optimistic mood in corporate America (e.g., through deregulation and tax breaks,) stockholder confidence can stay high despite a momentary drop in stock prices. Businesses will feel empowered and continue to expand and hire more employees.
Last but not least, wild swings in stock prices could impact market confidence more significantly. As a result, the fluctuation is likely to be more destabilizing for the job market.
Cadre is a quality over quantity boutique recruiting shop specializing in all things software engineering, robotics, artificial intelligence, and autonomous vehicles. Cadre is building a talent network utilizing AI and Machine Learning to help solve the tech talent crisis across their portfolio of 85 startups throughout California, Seattle, and Austin.