Job Creation Key to Stock Market Recovery
Posted by Eric Anderson on January 26, 2011
Equities had a burst of buying activity in December, and the month accounted for almost half of the gain that stocks enjoyed during 2010. For the year the best performing area were small caps, as the Russell 2000 increased 26.9%. After years of outperformance, the weakest relative performance was delivered by the MSCI EAFE, up +8.4%. The technology-heavy NASDQ was up 18.2%, while the Dow Jones Industrial Average rose 14.1%, and the S&P 500 increased by 15.1%. Last year was interesting in that if you had followed one of the long held market wisdoms, “sell in May and go away,” then you would have earned less than half of the total return for the year. The thought behind the expression comes from the belief that the summer / fall quarters are typically weaker than the early winter period through the late spring time frame. However, in 2010 September was actually the best month of the year at +9%. Given the 21% gain in the S&P 500 since the market’s lows at the end of August 2010, it would reasonable to expect some sort of consolidation / pullback over the next month or two. So far into the New Year it doesn’t look like this is happening yet, but a pullback can and often does come out of nowhere quickly.
Given that there has been a lot of talk lately about the unemployment situation in the U.S. we thought we should take a quick look behind the figures and statistics. Our general conclusion is that unemployment in the U.S. is likely to remain stubbornly high by historical standards, especially relative to the typical gains in employment that are experienced coming out of a recession.
The most recent unemployment statistics released by the Department of Labor showed a drop in the rate to 9.4% from 9.8%, as there were 103,000 additions to payrolls in December 2010. The job increase was below the consensus forecast increase of 150,000, but somewhat offsetting this was the fact that revisions for employment gains over the prior two months were higher than initially believed, with a net additional 70,000 jobs. Most of the credit for the jobless rate’s fall, and the expected level of 9.7%, was due to a declining workforce, as an estimated 260,000 discouraged workers gave up looking for work. The labor force has now declined for three months in a row, and participation (those looking for work) continues to decline.
Over the past recession / financial crisis a total of 8.5 million jobs have been lost, and while job creation did turn positive in 2010, with a total of 1.1 million jobs created, this still leaves a large deficit to be made up and a very large hill left to climb. The severity of unemployment during this downturn is really without comparison, as the prior post-WWII high watermark for long term unemployed peaked at 3 million people, coming out of the 1980-1981 recession, with an average of 21 weeks without work. By contrast today there are 6.4 million people unemployed, and those who have been out of work for more than 27 weeks increased to 44.3 percent of the total, with the average length of time at 34 weeks. There are a number of factors that might be causing the length of time to increase, such as the inability of workers to relocate due to the difficulty of selling their homes, either because of weak housing markets, or owing more on the house than could be realize from a sale. In addition, many small businesses, which have been the engine of job creation in the past, have been reluctant to hire given the uncertainties during 2009 over future taxes rates and also over concerns with new government mandates such as healthcare.
As was mentioned earlier, during last year, about 1.1 million jobs were created, which is the highest level since 2006, but 2010’s unemployment rate averaged 9.6 percent for the year, which was the highest level since 1983, and up from 9.3 percent in 2009.
Getting the unemployment rate back down to the 5% to 6% range is probably going to take longer than most people realize. According to research done by Wells Fargo Economic Group, assuming 2.5% GDP growth and considering annual additions to the work force, the U.S. could get back to a 6% level by the fall of 2014, if the economy adds 250,000 jobs per month. If instead it adds 200,000 jobs per month the 6% level would be reached in the late fall of 2016. The problem lies in the fact that over the past year the economy has only created on average 112,000 jobs per month, so if this rate were to continue, the 6% unemployment level would never be reached as the current pace of job growth is too low to keep up with the additions to the labor force. GDP could also grow faster than their assumed 2.5% and we think this will be the case for the next several quarters as the effects of the 2% payroll rate reduction is worked through the system. Another issue is that while private sector jobs have been growing, the outlook for government / municipal jobs is for a decline in employment as states, cities, and towns attempt to balance revenues with outlays.
Higher job creation is needed not only to reduce the unemployment rate, but also to keep consumer spending growing, as the consumer accounts for 70 percent of the U.S. economy. The most recent data points on spending have been fairly positive, as spending has been holding up reasonably well; in fact MasterCard estimates that holiday purchases in 2010 rose 5.5% which is up from 4% growth in 2009, and the best holiday performance in 5 years. The recent snow storms through out the U.S. have reduced some shopping in certain general merchandise retailers, but overall the tone remains constructive.