Job Cuts 2022: Are Layoffs Good or Bad for Stocks?

Source: 3rdtimeluckystudio /

One of the season’s most dominant economic trends has been layoffs. More specifically, the number of prominent companies that have been reducing their staff in droves. The list of companies announcing job cuts seems to be growing longer by the day, spanning many different sectors. Last week, Credit Suisse (NYSE:CS) confirmed plans to lay off 5% of its workforce by the end of the year. That number seems small in comparison to the looming 18% staff reductions that real estate platform Opendoor (NASDAQ:OPEN) recently announced. There are just two companies that will be implementing layoffs before the start of 2023. As more and more companies announce job cuts, investors are left to consider what it means for the stock market.

It’s sometimes hard to remain hopeful at a time when many companies are announcing layoffs. These trends can cast a dark shadow over markets, clouding investment decisions. But does this mean that the job-cut contagion will ultimately help turn things around in the coming year? Let’s take a closer look.

Layoffs Don’t Boost Stocks

It is not at all surprising that companies would be opting to reduce their staff in a raging bear market. Cutting costs is often necessary to save face after a turbulent year. As InvestorPlace contributor Faizan Farooque reports, the layoff watch trend has been rising. A company’s hiring practices, or lack thereof, can be an important indicator of its growth prospects. As he notes:

“If a company lays off staff, the move could signal a change in direction towards greater efficiency. On the other hand, it might be the case that the company is going through some financial troubles and is laying off employees to shore up cash.”

Farooque’s point is an important one, as it highlights a key detail for investors. Yes, layoffs are intended to help a company reduce costs by freeing up cash. However, this isn’t necessarily a recipe for an instant turnaround. Unless the company cutting its workforce also makes positive changes to the ways its business is run, layoffs are likely to pose little, if any, effect. Wayne F. Cascio of the University of Colorado Denver published a detailed study on the effects of downsizing. After comparing companies that employed extensive layoffs to others that did not, he concluded:

“As a group, the downsizers never outperform the nondownsizers. Companies that simply reduce headcounts, without making other changes, rarely achieve the long-term success they desire.”

By contrast, Cascio shows that stable companies will do what is necessary to retain their talent. That is another important point for investors to consider. A company that is quick to reduce its workforce, even in a turbulent economy, is not necessarily a stable investment. In fact, some investors may be inclined to bet against it as a result, seeing layoffs as an indicator of instability.

Cascio isn’t the only expert to find that layoffs don’t often boost stock prices. In 2010, Newsweek reported that between 1979 and 1997, 141 companies had announced layoffs and reported negative stock returns as a result. According to the study cited, “larger and permanent layoffs” often led to worse stock performances. The article notes another study in which 300 companies in the U.S. and Japan saw shares fall after announcing layoffs.

The Bottom Line

In sum, layoffs can benefit a stock but not by themselves. Laying off workers simply to report a more positive fourth-quarter balance sheet hasn’t been a recipe for success so far and it isn’t likely to be. Unless layoffs are a precursor to the important structural change a company needs to make, a stock isn’t likely to get a bump.

Investors employing a layoff watch strategy should look to see if a company announces any further changes after implementing a workforce reduction. If not, shares are unlikely to see any real growth.

On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Samuel O’Brient has been covering financial markets and analyzing economic policy for three-plus years. His areas of expertise involve electric vehicle (EV) stocks, green energy and NFTs. O’Brient loves helping everyone understand the complexities of economics. He is ranked in the top 15% of stock pickers on TipRanks.

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