Wall Street has a disturbing tendency to set its own well-being against the health of the economy at large.   You may have seen in the financial news how, in response to news of fuller employment, today’s Dow Jones Index typically becomes depressed.

Now, in commonsense terms, what could be more fundamentally desirable than having people who want work be able to find it?  Not only does this directly benefit the people who manage to become employed;  it also indirectly benefits the rest of us.  On just one level, it lessens our cost of supporting people on the unemployment and welfare rolls.   And on a more important level, it generates demand for the goods and services that the rest of us produce—which means that we and our employers all do a better business selling to the people who are newly able to afford things.

Why, then, doesn’t Wall Street like news of diminishing unemployment?

The standard explanation is that fuller employment carries a threat of inflation, which would tend drive up rates of return on bonds and other forms of investment outside of stocks, causing fewer people to want to invest in stocks, and thereby cause share prices to decline.   This analysis is not really inaccurate in any way. But neither does it fully or truly explain what’s going on.

Perhaps part of the problem is that we tend to hear something in this explanation that hasn’t exactly been said. 

When Wall Street savants speak of inflation, we may get the impression they’re talking about a condition in the economy at large, with the prices of everything from bread to gasoline climbing out of control, and a destabilized economy hurting all of us—including, almost incidentally, the investment community.

But they’re actually only talking about effects in the far more limited universe of investment instruments.   And their concerns are based on a premise that when other types of investments, like bonds or even CDs, can pay a more reasonable rate of return, the Dow will suffer.