WHEN “GOOD NEWS” MAKES STOCKS FALL, THE SYSTEM IS NOT BROKEN. IT IS WORKING.
Trump says strong jobs should automatically mean higher stocks, lower rates and even 15–20% GDP growth. That is not how monetary policy, inflation, bond markets or equity valuation work
There is a seductive simplicity to the argument President Donald Trump made after the release of the August employment report.
The United States created 162,000 jobs. That was far stronger than expected. Therefore, the economy is doing well. And if the economy is doing well, the stock market should rise. If stocks instead fall because investors fear higher interest rates, then — according to the President — something must be fundamentally wrong with the system.
Trump put it explicitly:
“The Market should go UP.”
He went further:
“GROWTH DOES NOT CAUSE INFLATION!”
And then considerably further still, arguing that the United States:
“should be doing GDP of 15 and 20%.”
These are politically powerful propositions because they reduce an extraordinarily complex system to an intuitive chain:
More jobs = stronger economy = lower rates = higher stocks = greater prosperity.
Unfortunately, economics does not work through that chain.
And financial markets certainly do not.
What happened after the August employment report is actually an excellent case study in how modern monetary economics and financial markets really work.
The market did not fall despite the good economic news.
To an important extent, it fell because the news changed the expected future path of interest rates.
There is nothing irrational about that.
There is certainly nothing “broken” about it.
It is asset pricing.
THE NUMBER THAT STARTED THE ARGUMENT: 162,000 JOBS
First, the facts.
The Bureau of Labor Statistics reported today that US nonfarm payroll employment increased by 162,000 in August, compared with an average monthly increase of only 31,000 during the previous 12 months.