A CIM Special Report: 2010

Where are the Jobs?

Why has the market advanced recently?

Did we have a “lost decade”?

If so, what is ahead?

[As carefully discussed on The Conservative Investor’s Radio Program.]

Where are the Jobs?

The media likes to highlight the “jobless recovery” headline. It sells. It also confuses people, so, lets attempt to correct that now. As the economy continues to recover, more jobs will be added, but it will take time. The job market is what we call a ‘trailing indicator’. This means than improvements typically take place after the economy makes improvements. Unfortunately, it does not encourage those who are looking for early recovery evidence.

It often takes a recession for many businesses to realize they were employing workers they did not actually need. At the same time, when the economy was humming, those same employers didn’t want to rock the boat – or pare their workforce to a leaner condition. Yet, when the economy stumbled badly, they were forced to let as many employees go as they could spare. That was a painful process. It is always difficult to discharge employees, and it is expensive. As a result, employers are not eager to re-hire and run the risk of repeating their recent history. And given the depth of our last recession, this time around there will be unusual reluctance to rehire. This is neither the news nor a reality that anyone wants. It is a very adverse condition that will be especially slow to correct itself.

The happy news is American businesses are making huge productivity gains. They have found they could get the job done with smaller payrolls, and given the burden of payroll taxes today, doing so will reduce costs and improve profits considerably. But sadly, that reality is on the back of many who are unemployed. This brings us to our next topic:

Why has the market advanced recently?

The stock market, unlike the job market, is a ‘leading indicator’. It essentially takes the temperature of investors. In addition, if investor’s decide that stocks have become inexpensive, and that productivity gains will lead to improving earnings, they historically take action in anticipation of those expectations. And that is precisely what has been happening. Yet inspite of the large advances that have taken place since the recession low, the market is still much lower than it was when the decline began. The DJIA (Dow Jones Industrial Average; “The Dow”) was about 14,000 when the mega-banks, Wall Street, mortgage lenders and other nefarious characters began revealing their bad character. They were the causes of the big turndown. So it was much more of a cause-and-effect condition, than a typical ‘top of the cycle’ downturn. A liquidity crisis developed quickly and less experienced investors used their fear to divest. Stocks moved from weak hands to stronger and more experienced hands.

But all of that is history now, and the market is not only moving back to higher and more appropriate levels, but it is “telling”. It is telling the average person that the economy and the liquidity crisis has been attended to, and things are getting better. Not forever, but for as far as the optimists can see, at present.

Did we have a “lost decade”? If so, what is ahead?

Future Past Present
Again, we would say this ‘lost decade’ talk is good for selling what the media sells. But it is not helpful, even though the S&P 500 is roughly at the same level as it was about 10 years ago. A recent quote from Bill Miller, the legendary investor, may help to re-establish perspective:

“…There have been fourteen 10-year periods where stock returns have been negative, including this [last] one. In every one of the previous 13, the subsequent 10-year returns have exceeded 10%, about 50% more than average, and more than double the return of government bonds. So every time stocks have performed poorly for 10 years, they have performed better than average for the next 10 years, and they have beaten bonds every time by an average of 2 to 1.”

Thank you Bill Miller. We would make two more points: First, as soon as you change the starting and ending date of any ten-year period, you produce different results. If you just go back a few years, that trailing ten-year period looks entirely different. That will likely be the case a few years from now, but we can’t make those calculation until we get there. Second, why did the complainers of the last decade fail to mention the decade that preceded this last one? That was a rather incredible decade. In its beginning, in 1990, we saw many positive factors coming together and went public with our view that there was a high probability that the Dow could hit 10,000 by 2000. We were wrong. It actually got there in 1999. However, it was at about 2800 when we made our expectations known. And therefore, the preceding decade had an almost four-for-one advance! While that was hardly a normal or typical decade, we strong submit that the last decade was not normal either. Bill Miller’s good comments above help make that point, and they are a great reminder that things don’t get weak and then stay there forever. Rather, sometimes they move along in a somewhat steady manner, and sometimes they move along in an alternating fashion of too much followed by too little. This serves to confuse us, yes. And unfortunately, it does not serve to provide us with perspective or understanding. This report is our attempt to help investors to see the difference.

Concluding comments:

To say 2009 was memorable is an understatement.

To future historians and economists it will be the year to which all forthcoming bear and bull markets will be compared. For investors, recovery was the word for 2009. In fact, the volume for Google searches and news references for the word “recovery” soared over the course of 2009, especially relative to the word of 2008: “recession”. 2009 began in the midst of a bear market plunge that was the worst since 1932 and the free-fall suddenly rebounded into a “V”-shaped rally of 65% from March 9 through mid-December, the most powerful nine-month rally in the S&P 500 since 1933.

For 2010, ‘sustainability’ may be the word —

not merely because climate change [may] be on Washington’s agenda, but primarily as it pertains to continuing the economic and market recovery witnessed in 2009. In brief, we believe, the recovery is likely to be sustained with economic growth in the 3-4% range in 2010. *

*Courtesy of LPL Financial Research – 600521

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