Bad Economic News Does Not Mean It’s Time to Sell Stocks

Jobless Rate Surges to 7.2% in December

The headline in The Wall Street Journal echoes the news that the US government’s Bureau of Labor Statistics reports unemployment is higher. More than 500,000 people lost their jobs in December, and unemployment rose from 6.9% in the previous month.

However, the government news release is actually 31 pages long and provides more details than the headline number that every newspaper in the country touts. We’ll look at page 21, Table A-12, for more insight into how many Americans are actually suffering job losses in the current economy.

That table, “Alternative measures of labor underutilization,” includes additional categories of people without full-time jobs who are not considered unemployed. These include:

• Marginally attached workers, which are defined as people who don’t have a job and aren’t looking right now. They do want a job and BLS reports that they have looked for work sometime in the recent past.

• Persons employed part time for economic reasons are those who want a full-time job but have had to settle for a part-time schedule because they can’t find anything else.

• Discouraged worker are the long-term jobless. They have been unemployed for at least a year and are therefore no longer counted in the official statistics.

If we include these people in the unemployment rate, the number nearly doubles – 13.9% of Americans are officially unemployed, not working but not considered unemployed by the government, or took a part-time job because they can’t find anything else. Government reported unemployment and alternative measures are shown in Figure 1. ShadowStats.com is a statistical service that adds in job losses in small businesses that the government is unable to track in real time.

click to enlarge

Figure 1: Real unemployment is higher than the government reports. In this chart, courtesy of ShadowStats.com, we see various measures of unemployment meant to display a “true rate” that they calculate to be more than 16%, when all persons without the desired degree of meaningful employment are factored in.

While unemployment is high, and probably headed higher, we need to remember that this is a lagging indicator of economic activity, or at best a coincident indication. During the two most recent recessions, unemployment peaked about 18 months after the recession officially ended. In previous recessions, unemployment peaked near the time that the economy was beginning to recover.

The stock market is a leading indicator of the economy, and the next bull market is likely to be well underway by the time that the headlines tell us unemployment is declining and better times are ahead. This can be seen in Figure 2.

Figure 2: This chart presents the average performance of stocks during all recessions since 1945. It shows the bottom in stocks tends to occur halfway through the recession.

According to Ned Davis Research, on average, stocks peaked about nine months before the recession starts and they bottom about five months before the recession ends. However, each recession is different. During the 1990–91 recession, the stock market reached its high less than a month before the recession began, but stocks peaked almost 15 months before the recession started in March 2001. The bottom was reached about two months before the end of the 2001 recession and more than eight months prior to the end of the 1953–54 recession.

As Warren Buffett says, “In the business world, the rear view mirror is always clearer than the windshield.” Because stocks lead the economy, it’s important to stay invested in good times and bad. While it may seem difficult to stay the course after deep losses in 2008, history indicates now is not the time to panic.

Comments

[ain't no fo...:]

Well, I agree with the jobs numbers seriously misrepresenting the depth of the jobs crisis and follow the Shadow stats myself.

But then again, this is not your father's run of the mill "recession".

And if I am reading your lower chart correctly, and if I take December 2007 as the start of the recession, as is being postulated now, that 5 months "normal" time frame for the market to bottom out would have it at its lows in the May/June 2008 time frame... which as we both know was a rather high water mark for the 2008 markets, and we certainly know what came after that.

So we have a recession that is already considered to be 12-13 months old (as opposed to the normal 10) and I don't see an end anywhere in sight yet.. so why would I assume we have seen our lows in the markets yet?

Jan 12 12:05 PM

[ain't no fo...:]

P.S. I'm afraid I didn't take your advice on holding onto my stocks last year nor do I hold much of anything overnight these days... I traded extremely short term, didn't believe a word the pundits and brokers and experts and CNBC shills said, and PROTECTED MY CAPITAL AT ALL COSTS.

And I paid attention to the CHARTS... because the charts tell me what people DO, not what people SAY they are doing.

Perhaps not surprisingly, I am grateful to say I missed last year's carnage... with all kinds of cash available now to invest when the markets DO bottom.

I believe that may be considerably lower than here... we may have a tough time holding the November lows.

Jan 12 12:13 PM

[Mike Carr:]

The lower chart shows the average recession. The market bottoms halfway through the recession. Since they have averaged 10 months, the bottom occured at month 5. We may have seen a bottom in Nov, which would say that this recession still has a ways to run. But the market should turn higher before unemployment peaks and the recession ends.

The bottom chart was illustrative, not tradable.

Jan 12 12:33 PM

[ain't no fo...:]

I guess my major concern is not the duration of a "normal" or even abnormal recession, but rather whether it is a recession at all, or something far more dangerous...

I added to my DXD's today on the premise that the primary trend is lower, regardless of whether it is called a tomahto or a tomayto ;-)

Jan 12 03:13 PM