The Impact of Unanticipated Negative News on the Equity Markets

Background: On Friday, June 1, 2012 the Labor Department released the employment data for the month of May. The two Bloomberg.com articles below describe (1) the market’s expectations just before the release of the data and (2) the actual data. Following these two articles, the immediate reaction of the U.S. stock market, as measured by the Dow Jones Industrial average, is noted.

(1) Payrolls in U.S. Probably Picked Up From Weakest in Six Months (Bloomberg.com)

Hiring in the U.S. probably picked up in May, a sign of renewed progress in the labor market, economists said before a government report today. According to the median forecast of 86 economists surveyed by Bloomberg News, payrolls [are expected] to climb by 150,000 workers. The unemployment rate [is expected to hold steady] at a three-year low of 8.1%. The Labor Department’s report is due at 8:30 a.m. EST. Bloomberg survey estimates ranged from payroll increases of 75,000 to 195,000. Expectations for the unemployment rate, ranged from 8% to 8.2%.

(2) U.S. Employers Add 69,000 Jobs, Fewer Than Forecast (Bloomberg.com)

The American jobs engine sputtered in May as employers added the fewest workers in a year and the unemployment rate rose. Labor Department figures showed that payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey. The median projection [expectation] called for a 150,000 May advance. The jobless rate rose to 8.2% from 8.1%. Estimates of the 87 economists surveyed on payrolls ranged from increases of 75,000 to 195,000. Released On 6/1/2012 8:30:00 AM For May, 2012 Prior Consensus Consensus Range Actual Nonfarm Payrolls - M/M change 115,000 150,000 95,000 to 206,000 69,000 Unemployment Rate - Level 8.1 % 8.1 % 8.0 % to 8.2 % 8.2 %

Reaction of Equity Markets to Unanticipated Negative News

On Thursday, May 31, 2012, the Dow Jones Industrial Averages closed at 12,396.17. On Friday, the NYSE opened 30 minutes after the release of the employment data. The Dow opened on Friday at 12,252.07, down 144 .1 points, or 1.16% (see chart below).