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Over the last several weeks, the stock market has suffered a setback. So, are we on the cusp of the dreaded double-dip recession and another market crash? History indicates that we will avoid both, and that we are on a bumpy path to a normal recovery.
According to the well-regarded stock market historians at Ned Davis Research, Inc., “the recession ended in June 2009, so 2010 would likely mark months six to 18 of the expansion. Historically, the odds of a 10% correction in the S&P 500 between six and 18 months into an expansion are 77%.” Therefore, the present correction should not be unexpected. Rather, as the economy regains its footing, it is ordinary to experience a market pullback.
Not only is the stock market bound to experience temporary downdrafts as the economy improves, but high unemployment can also be a stubborn adversary that persists well into a budding recovery.
The last time unemployment reached today’s level was the early 1980s. From March 1982 through September 1983 – a period extending 19 months – the national unemployment rate stayed above 9%, peaking at 10.8% in December of 1982.
The economy experienced sluggish growth rates of 2.2%, negative 1.5% and 0.3%, as measured by gross domestic product (GDP) in the three consecutive quarters leading up to the December 1982 peak in unemployment. However, the economy started to grow in the subsequent three quarters at rates of 5.1%, 9.3% and 8.1%, respectively, while unemployment remained above 9%. In other words, the economy began to grow aggressively even when unemployment was high.
Thus far in our present employment quagmire, the peak of unemployment was 10.1% in October of last year. Unemployment has been in excess of 9% since May of 2009, a total of 9 months so far. In the past three quarters, GDP has registered growth rates of -0.7%, 2.2% and 5.7%, respectively. If unemployment has indeed peaked and if history is any indication, the next three quarters could auger respectable economic growth even while unemployment remains elevated.
The early 1980s and what we are observing today clearly suggest the potential for renewed economic growth despite high unemployment, and the relatively mild recessions of 1991 and 2001 also indicate the same pattern. In 1991, payrolls did not increase for about a year and in 2001, it took two years, according to Albert Bozzo writing on CNBC.com. Each of the past three recessions, including the one we just experienced, indicate that employment is indeed a lagging economic indicator.
The 2000s was a “lost decade,” both for the U.S. job market and stock market. Today there are only about 100,000 more jobs in America than there were ten years ago. This compares unfavorably to the creation of 20 million new jobs throughout the expansion of the 1990s, also according to CNBC.com.
As for the stock market, the S&P 500 posted an average annual decrease of 0.9% a year from 2000 through 2009, including dividends. This was the first negative return for a full decade since modern stock market data began in 1927. Without dividends, the index has lost 24% of its cumulative price value over the last ten years. This compares to a 42% cumulative price loss during the 1930s. But, during the ‘30s, the dividend yield was substantially higher, resulting in an annualized 1% positive total return throughout the Great Depression decade.
Based on the funk of the last decade, it could be easy to perceive that the 2010s will be no different. In fact, Pacific Investment Management Company, the manager of the world’s largest bond fund, has gone so far as to predict a “New Normal” economy that features a dismal employment picture, crushing budget deficits, and lackluster economic growth. But, it is human nature to project the recent past into the foreseeable future. To the contrary, we believe the malaise of the past decade is one compelling reason to feel optimistic about this new decade. In fact, over the last century, the U.S. economy has never endured two consecutive “lost decades.”
Markets and capitalist economies can be surprising beasts. For example, if someone predicted several years ago that Toyota Motor Corporation of Bunkyo, Japan would today be engulfed in a quality crisis, while Ford Motor Company of Detroit, Michigan would be engaged in a relative boom, you might have laughed them out of the room. But markets often derail even the most widespread expectations.
The simple idea that economies and markets run in cycles of boom and bust and outperformance and underperformance is a powerful one. It is sensible to heed the advice of the great investor Sir John Templeton who famously intoned, “The four most dangerous words in investing are ‘This time it’s different.’”
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