Layoffs And The Stock Market

By Stephan Abraham | January 23, 2013 AAA

An endless stream of bad news seems to emanate from the business and finance world these days, with negative business news stories about corporate layoffs. Perhaps this is more tangible to everyday Americans than the bickering of what the tax rate should be on millionaires and billionaires. It seems that every few weeks we hear of corporations firing thousands of rank-and-file employees. Recent examples are Citigroup (NYSE:C), which laid off around 11,000 employees from its workforce in December; and one-time tech darling Hewlett-Packard (NYSE:HPQ), which reduced its headcount by 29,000 within the last four months.

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Does It Really Matter?
A famous saying goes something to the effect that a recession is when your neighbor loses his job; a depression is when you lose yours. Any company that is "downsizing" leads to anxiety for those who are still working. Economists believe a lot of spending is based on future and not necessarily current earnings. Employed workers are less likely to spend freely with tenuous job security. This spending "contraction," if sustained, may impact overall Gross Domestic Product (GDP).

Also keep in mind that a lot of these layoffs are skilled, high-wage jobs. In addition to naturally increasing the unemployment rate, one could argue that a glut of workers will depress future wages for all workers. It's the basics of supply and demand - a lot of qualified workers chasing just a few jobs. This allows employers to "squeeze" wages downward significantly. Recently released workers are assumed to be willing to take a lower-paying job as opposed to being unemployed. Experts often try to bundle all of these events and even quantify them with nebulous terms such as "consumer confidence" or "consumer sentiment."

So what's the impact on our stock market of these companies firing workers? The answer is: It depends. When corporations execute massive layoffs, it usually indicates weakness. Companies that are having trouble increasing revenues are likely to try and minimize expenses by eliminating the most costly component of their business: employees.

Corporate earnings are a reliable predictor of stock prices over the long term. Hewlett-Packard's announced layoffs occurred when its stock was trading at $24 a share, already down significantly from 2011 prices. Today's prices are around $13 a share. The stock was already trending downward before these announced layoffs. Hewlett-Packard seems to have some systemic issues.

On the other hand, Citigroup's share price has actually risen since it announced forthcoming job cuts. The stock market tends to try and find efficiency or value in companies based on their earnings or earnings potential. Reducing a workforce is one way to achieve that objective.

The Bottom Line
So, how does the individual investor deal with the apparent mixed messages inherent in company or industry-specific announcements? There are ways to keep informed as to "why" these layoffs are occurring. Take some time to research each company's fundamentals and rankings within its sector. The financial sector, for example, has been fraught with depressed earnings and a difficult regulatory environment over the past few years.

Wall Street will expect some type of fat-trimming for these companies to remain competitive. Be aware, however, of layoffs in companies that have a competitive disadvantage resulting from internal ineffectiveness or an inability to compete. Of course, companies are not going to come out and state that they are failing, so you have to read between the lines to gain insights and develop a critical mindset when trying to decipher the reality of the situation.

Perhaps most important is to keep perspective around layoffs and the stock market. Layoffs are a real part of an increasingly competitive global landscape. Outsourcing jobs is also commonplace in today's workplace. If you own shares in a company that has announced layoffs, reach out to your investment professional or do the research yourself to determine the root cause. Be proactive with your investment dollars. Layoffs are part of life, it seems, but they don't have to necessarily negatively impact your investment portfolio.

At the time of writing, Stephan Abraham did not own any shares in any company mentioned in this article.

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