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Sy Harding founded Asset Management Research Corporation in 1988 for the purpose of providing stock market and economic research to institutions and serious investors. Harding’s engineering background, coupled with his experience in operating high-tech businesses through numerous economic... More
My company:
Street Smart Report Online
My blog:
Street Smart Post
  • Wow! The Economic Recovery Surprises Continue! February 3, 2012 0 comments
    Feb 3, 2012 2:33 PM

    I've been writing some quite optimistic and positive columns since October, quite a contrast to the negativism I was exuding last April in explaining why I expected a significant market correction during the summer months.

    There certainly has been reason for optimism since October.

    It wasn't just that the stock market was about to enter its traditional favorable season, and was coming off a significant correction low that had the S&P 500 down 20% on October 3. It was that it was beginning to look like the economy was recovering after its stumble in the first half of the year.

    As it has turned out, not only did the economic recovery resume in October from its first half slowdown, but some surprising data has come out regarding the entire 3-year recovery from the 'Great Recession', data that is in sharp contrast to the gloom and doom projections so popular in 2008 and 2009 (which even continued in some quarters in 2010 and 2011).

    I noted some of the positive surprises a couple of weeks ago, including that most of the highly criticized rescue loans to banks and the auto industry have been paid back, with interest, and that the U.S. auto industry is solidly back on its wheels. For instance, just three years after its bankruptcy, General Motors has regained its crown as the top-selling car-maker in the world. In other data, the Federal Reserve has even made profits, exceeding $155 billion, so far on the 'toxic' assets it moved from the books of banks to its own books, and on the Treasury bonds it bought in its two rounds of quantitative easing.

    I also noted the Financial Times report that since the start of the global recovery manufacturing employment has grown faster in the U.S. than in any other leading developed economy, with more net manufacturing jobs having been added in the U.S. since the start of 2010 than the rest of the Group of Seven developed countries put together.

    There are other positive statistics not widely recognized in the midst of the recent focus on the risk in the eurozone debt crisis.

    For instance, S&P 500 earnings have increased 125% since the end of 2009, their fastest expansion in a quarter century. The result is that even though the stock market has doubled since its 2009 low, the S&P 500 price/earnings ratio has declined, currently at 13.7, lower than its long-term average of 16.4, leaving the S&P 500 potentially still selling at bargain prices.

    And of the $37 trillion of stock market valuation erased during the 2008-2009 financial meltdown and severe bear market, $24 trillion has already been restored.

    "Yeah but," the gloom and doomers say, "what about the miserable employment picture? You can't have an economic recovery with so many people out of work."

    But how many realize what has also happened in the employment picture? As of the end of the year, the unemployment rate had dropped from 9.8% (in 2010) to 8.5%.

    Each monthly decrease was met with disbelief and claims that it was a one-month aberration caused by seasonal factors or whatever. But the improvements kept coming.

    December's big increase in new jobs was supposedly due to additional hires for the holiday shopping season, which would be reversed in January. In fact, the consensus forecast of economists was that January would see only 121,000 new jobs created.

    But wow! The Labor Department's employment report on Friday showed that 243,000 jobs were created, double the expectations. And further, the number of new jobs reported for November and December were revised up by an additional 60,000. And the unemployment rate dropped again, from 8.5% in December to 8.3% in January. A separate report on Thursday showed that new applications for unemployment benefits have fallen to their second lowest level since June, 2008.

    Not that employment is back to its pre-recession levels. There are still 12.8 million people looking for work, and while an unemployment rate of 8.3% is much better than 9.8%, unemployment averaged only 5.4% in the ten years prior to the recession (and 5.7% over the last 60 years). But the trend continues in the right direction.

    And we need to realize that employment is a lagging indicator. Employers don't begin hiring again until the economy has recovered enough that they can't keep up with demand without adding workers. So in that respect the increasing momentum in the jobs picture may indicate the recovery is further along than previously thought.

    That may have implications that the Fed is behind the curve (again) in saying last week that it will probably keep interest rates near zero until late 2014, instead of its previous target of 2013. But that's another subject.

    Meanwhile, as would be expected, the stock market responded very positively to Friday's jobs report, tacking on still more gains in its rally off its October 3 low.

    A word of caution for those who are not already in the market and may be tempted to jump in whole hog at this point.

    As my subscribers know, for many years I've referred to the monthly jobs report as 'The Big One'. That's because it's so difficult to predict that it most often comes in with a surprise in one direction or the other. That in turn most often results in a kneejerk reaction by the market that creates a one to three-day triple-digit move by the Dow in the direction of the surprise. The other side of the pattern is that the initial outsize reaction to the report is then usually reversed over the following days and the market returns to normal.

    But then, normal may not be a bad thing, given that the market is now entering its fourth month of rally off that October low.

    Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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