What comes first, employment recovery or market recovery? The answer may shock you!
“Fastest Job Loss Ever!!!!”
Wow, what an ugly headline.
There we were, merrily rolling along last week, happy as clams.
Our leaders were all hugging each other in London and congratulating themselves for saving the world… factory orders were up for the first time in six months… the talking heads on cable were spouting off as to how we were actually edging back into positive territory for the first time this year…
Halcyon times, eh?
And then some Washington bureaucrat in an ill-fitting suit had to go and spoil it all by announcing that March saw another 663,000 folks get the old pink slip. He even went on to point out that we now had the highest rate of unemployment since 1983.
Man, what a buzzkill! Stopped that ol’ rally right in its tracks.
Now when I see headlines that shout stuff like “Best,” or “Most,” or “Worst Ever” or some such, it immediately gets my hackles up. Superlatives like that almost always blind one to the truth of the matter.
So I went and got myself a cup of black coffee, and began to delve deep into “Statistic Land.” It’s a grey and dismal place that can drive ordinary mortals mad. But to mildly obsessed finance guys like me, it’s like cutting a three-year-old loose in a candy shop.
I’ve created three charts for you to peruse. Each places unemployment patterns in the context of previous recessions over some 20 years.
The first thing you might notice is that unemployment does indeed go up during recessions. “Well duh: That’s kind of obvious, Lass!” you might very well say at this point. Yeah, well, as long as we are belaboring the obvious, our “worst ever unemployment” is still below 1982’s figure of 10.8% by a gross 2.3% and a proportional 21.30%.
Now as long-time readers know, I don’t particularly trust the fine granularity of these figures, as I know for a fact that Washington juggles the books quite a bit. What’s more, I have read that if we were to count in discouraged searchers and folks who have temporarily accepted part-time work just to keep body and soul together, the actual figure would exceed 15%. And who’s to say that we won’t hit figures like that before the dust settles.
Finally, I will grant that this many folks getting fired stinks. It’s rough on the people who are trying to keep their lives together, it’s tough on their families and friends and it’s hard on the communities where they live.
But quite honestly, this column is only about economics when it pertains to investing. So what does all this unemployment hullabaloo mean for investors and traders?
Well if you examine the charts carefully, you see that certain correlations that held true for most of the modern era broke down over the past twenty years.
In the first two time segments, 1948-1968 and 1969-1989, employment climbs pretty close to nonstop throughout each cycle of business expansion, while unemployment begins to climb at the beginning of a recession and turns the corner at the end of each business cycle trough.
This clockwork-like correlation is not accidental in the least. Post the Great Depression, the acknowledged goal of the federal government was full employment, or at least as close to such a thing as was achievable. In point of fact, Washington borrowed and spent trillions to achieve this, running up sizable deficits along the way and engendering substantial inflation as well.
But now look at the last chart, covering 1990 to the present. Beginning with the recession of 1990-91, we see a major change in the pattern. The recession ends, but unemployment continues to climb another gross 1% and proportional 14.71% over the next 16 months!
What on Earth is going on here? Well it’s relatively simple: While Washington was publicly touting “a more compassionate conservatism,” Wall Street had no such compunction, and was taking advantage of this opportunity to shed excess labor costs. In fact, they managed to get a whole five quarters of increased profits onto the books before they even began to start hiring again.
We see the same pattern again come the 2002 recession. A rise in unemployment actually precedes the recession. It’s almost as if the folks at the top saw it coming. Once again, we saw companies using this opportunity to clear overhead off their books, with the bottom of the business cycle coming almost two years ahead of the bottom of the hiring cycle.
My point here is simple. Yes, it’s a big deal when a lot of folks get fired. Heck, in terms of gross numbers, there are probably more folks out of work right now than in 1929. ‘Course, the economy’s a heck of a lot larger too.
And as much as we want the best for all those folks who are hurting, we do not need to see a recovery in employment to see a recovery in the stock market.
In fact, a lag between the two may be exactly what Wall Street needs to pull itself up by its own bootstraps.
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