Joblessness May Keep Soaring Well After Recovery
7/8/09
By PALASH R. GHOSH
A DOW JONES NEWSWIRES COLUMN
What goes around comes around.
Unemployment is rising to alarming levels, the nation’s banking/financial systems are in tatters as a result of deregulation and risky lending policies; the housing and automobile sectors are imploding; and the government’s bailout of big corporations is under heavy criticism.
Sound familiar? This describes the scenario during the 1981-1982 U.S. recession; though it could also apply to our current malaise.
And if history is any guide, the nation’s jobless rate — now at 9.5% as of June 2009 — could continue rising, even if the stock market keeps climbing and the economy gradually recovers.
Let’s look back more than a quarter-century ago. The recession of the early 1980s began in the summer of 1981 and lasted through the end of 1982, when unemployment reached a post-war peak of 10.8%. But stocks started rising well before that.
From the bear-market low of mid-August 1982 (when the jobless figure stood at 9.8%), the Dow Jones Industrial Average surged nearly 60% over the subsequent 12-month period. During that interval, the unemployment rate kept climbing, then plateaued at just above the 10% level for many months, before commencing a gradual descent in August 1983.
Joblessness dropped to about 7.2% by Election Day 1984, more than two years after the market bottom.
Talk about a lag factor.
Looking strictly at stock market performance, we see some striking similarities between now and then. Equities have jumped off the March 9, 2009, lows in very similar fashion to the recovery trade coming out of the 1982 recession.
In the 80 trading days starting March 9, the DJIA gained 29%. In the 80 trading days starting Aug. 12, 1982 (the market bottom for that period), the DJIA gained 32.7%.
But with the current recession already having lasted some 18 months (and counting) without any clear signs of relief, joblessness has risen more rapidly than in previous recessions. And it could rise to unprecedented levels, even if equities show any sustained strength.
Moreover, unemployment is unlikely to decline until well after the economy rebounds — the question is, how long after?
Howard Kornblue, senior portfolio manager at Alpha Fiduciary Generational Wealth Management in Phoenix , expects U.S. unemployment to peak at between 10% and 11% in the fourth quarter of this year — about the same time many are forecasting the recession to end.
“We are seeing strong momentum in unemployment,” he said. “I don’t see anything that will help to alleviate the jobless rolls.”
Employment, the stock market and the economy weave a tangled web indeed.
A true economic recovery would have to be supported by a resurgence in consumer spending and housing prices — quite a tall order indeed. Even if those two pillars return to some sound footing, corporations would remain hesitant in hiring again anytime soon, suggesting that joblessness may accelerate, even in the most optimistic of scenarios.
–Palash R. Ghosh has been writing about U.S. and international equity and bond markets for the past 17 years. He can be reached at 212-416-2165 or by email at palash.ghosh@dowjones.com.
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Investors Losing Patience with Weak Data
5/14/09
By PALASH R. GHOSH
A DOW JONES NEWSWIRES COLUMN
No more Mister Nice Guy.
The stock market’s negative reaction on Wednesday to surprisingly weaker-than-expected April retail sales and a jump in April foreclosures may suggest that investors have lost patience with poor economic data.
The recent two-month rally — which may now have exhausted itself — appeared to have been driven by hopes for an economic recovery, coming off of a base of unprecedented pessimism.
But if we witness more evidence of pervasive economic malaise, investors would seem to have no choice but to swallow their optimism.
“We’ve had a sprinkling of good economic news and bad news for the past few months,” said Michael A. Yoshikami, chief investment strategist of YCMNET Advisors.
“I think that over the duration of the stock rally, investors focused too much on the good news as a counter-balance to all the bad news.”
People have been willing to give the economy and corporations the benefit of the doubt, according to Howard Kornblue, senior portfolio manager at Alpha Fiduciary Generational Wealth Management in Phoenix .
“During the rally, investors appeared to buy stocks at the slightest suggestions of economic stability,” he said.
For example, last Friday’s employment report showed that more than a half-million people lost their jobs in April and the unemployment rate climbed to 8.9% — but the stock market surged. Investors seemed to take the severe job cuts in stride, believing the reductions weren’t as horrific as previously feared. After all, 540,000 isn’t quite as devastating as the nearly 600,000-plus job losses recorded in March (for good measure, the markets yawned at that huge employment drop).
Similarly, certain individual stocks have enjoyed gains on days in which they posted large losses; once again, on the premise that results were still better than expected.
But now, in the wake of this bursting rally, if retail sales and housing data continue to disappoint, that would raise doubts about the likelihood of a recovery, which would translate into falling stock prices. As investors over-reacted to seemingly benign economic data during the rally, things could swing the other way — that is, we might see some over-reaction to negative economic developments.
Lawrence Glazer, Managing Partner at Mayflower Advisors, sees another explanation for the rally from March’s depths.
“Over the past two months, investors were relieved that volatility had at least temporarily subsided,” he said.
“Expectations going into earnings season were low and fear was the dominating emotion in the beginning of March,” he said.
“With relatively low energy prices and mortgage refinancing relief, consumers and investors had some unexpected ammunition.”
Now, the market’s focus appears to be shifting away from simple survival to ongoing sustainability, said Alan Gayle, senior investment strategist at RidgeWorth Capital Management.
“Equities cheered the “less bad” numbers in recent months, but now the markets are looking for growth.”
Indeed, it’s hard to believe that another cataclysmic jobs report next month would provide even the most optimistic, spin-minded investor with any solace.
“If joblessness gets worse, and more houses fall into foreclosure, equities will be under pressure,” Yoshikami noted.
“Although March lows are a long way from where we are at today. ”
Glazer indicated that investors are concerned corporate America has been cutting to inflate their earnings — at the expense of the workforce.
“If unemployment continues to rise this summer, the optimism might hit a wall and cause investors to take pause,” he said.
Clearly, if the recession shows signs of hardening, it would demonstrate the market was premature in discounting a recovery — and now stocks will probably be much more sensitive to negative earnings and economic data.
–Palash R. Ghosh has been writing about U.S. and international equity and bond markets for the past 17 years.