After this morning's employment report, all of the hopefulness that surrounded an impending
economic recovery is quickly eroding. With total jobs lost coming in at a worse than expected
190,000, and the unemployment rate finally jumping to 10.2% barrier, gloom and doom are
reentering the scene. Those searching for glimmers of economic growth are once again scratching
their heads and trying to determine when we will finally see the turn from contraction to growth.
As easy as it is to allow ourselves to become enamored with these short-sighted views, as
investors we are better served to take a long-term perspective. Economic data is often revised
numerous times and the likelihood of this number standing as a definitive statement of the
employment market is virtually zero.
Instead, let us focus on two long-held beliefs that often accompany the release of
employment data. The first is that employment is a lagging indicator. When the economy begins
weakening, employers are slow to lay off workers with the hope that the slowdown is temporary and
robust growth will quickly resume. When they eventually trim jobs, these same employers do not hire
staff in anticipation of an economic rebound, but add new jobs only when existing staff cannot
handle the influx in new orders. Since the disappearance and creation of jobs both lag the turn in the
actual economy, people view employment as a lagging indicator. Following this logic, one cannot
associate a still weak economy with a weak labor market.
The second belief is that the stock market is a discounting mechanism and acts as a
predicative indicator. Since the value of an asset is the sum of its discounted future cash flows,
increases in the stock market are thought to indicate that future economic growth will increase,
while declining stock prices show weakness ahead. While studies of investor emotion have damaged
the long-held view of the market accurately reflecting the future, arguing that millions of profitseeking
investors are always wrong about the future is a high hurdle to cross. Instead, we should
assume the market is an accurate forecaster on most occasions with temporary instances of
Following the logic of these two arguments, one could assume that when jobs stop
disappearing, the economy will already be in the process of expanding and the market will already be
in rally mode in anticipation of this expansion. If we accept these arguments, the only event that
could propel the market even higher is increasing employment, which would signal that the economy
continues to expand.
To test this theory, I revisited a chart that consistently appears in my weekly newsletter.
Since 1948, there have been seven periods of sustained job loss that lasted from nine to 22
months. Looking at where the S&P 500 traded when jobs stopped disappearing and then where the
market was when the subsequent growth led to the recovery of those jobs, we see some interesting
First, before we became a much more service-based economy, the recovery of jobs that had
been lost during a recession typically required only nine to 12 months. During the first jobless
recovery, which occurred in 1991, that number stretched to 20 months, and after the most recent
recession 33 months were needed to recover all those jobs.
Second, the movement of the S&P 500 from the time when jobs stopped disappearing to
when they were finally recovered has averaged 13%, with all of the changes falling in a tight range.
What has differed is the return delivered to investors. The quick recoveries from 1982 and earlier
delivered average annualized gains of 15%, while the most recent recession delivered average gains
Looking at these results, I arrive at two conclusions. The first is that the stock market does a
solid job of forecasting the future. By the time job losses cease, the stock market has already
forecast the turn in the economy and rallied in anticipation of better times. The second conclusion is
that those looking to make a quick profit from this market in the years ahead face an enormous
As the economic damage suffered in this recession is well beyond any historical comparison
other than the Great Depression, I expect the time to recover the 7.4 million lost jobs to be extremely
lengthy. If we follow the 2002 format, it would require nearly 10 years. My bet is it will be longer. If
we then see the typical 13% rally during this time period, buy-and-hold investors will be left with a
slightly higher than 1% annualized return.
Expecting subpar investment returns years into the future, I maintain the stance I have
followed for nearly a year. The age of buy-and-hold is gone forever. At times (such as the current rally
from the March low) this approach will look brilliant, but only those who are constantly tweaking their
risk profiles and looking for opportunity will prosper. We will remain in a decade-long trading range
where prices go up and down, but only those who are active will emerge better off.