Wednesday, March 10, 2010

The most dismal science

By Dr. Jason White
Director of Investments
Family Investment Center

On March 9, 2009, investors capitulated. Capitulation is an important word in the world of finance and investing. Essentially it means that everyone who was going to flee the stock market, in fear that prices would continue to drop lower, had fled. Panic selling was done. The Dow Jones Industrial Average closed at 6,574. The S&P 500 had hit bottom a couple of days earlier at 676, and the technology-laden NASDAQ composite was at 1,268.

No one knew it at the time, but that was the bottom. The nadir. Capitulation happened right before our eyes. It was a tough time to be a long-term investor. But as always, it was the right strategy.

Today, markets have rebounded and the economy is growing again. The Dow is up 61 percent since capitulation. The S&P 500 is up 68 percent, and the NASDAQ has soared 85 percent higher. Nevertheless, stocks still have a lot of upside to go before reaching the pre-recession peak of 14,000+ on the Dow.

Many people refer to economics as the “dismal science” and often for good reason. For example, economists know that the last sector to recover after a recession is the labor market. Corporate employers are quick to layoff workers as the business cycle slumps, and then slow to rehire in the recovery.

This recession is not atypical.

Whether or not you follow economic statistics like I do, you have probably felt increased pressure to get more work done on the job than in the past. Maybe you are doing your own work plus half of the work a fired former co-worker may have been doing. You are stretched to the limit and stressed to the max. Economists have a happy name for the condition you find yourself in: increased productivity!

It is not at all unusual to see productivity gains during a recessionary period as the ranks of the unemployed swell. This is a by-product of a capitalist economy. As the economy and company sales continue to grow, employers will eventually hire again.

Job loss has flat-lined. A year ago, 700,000 more workers were being fired in a month than were being hired. Today it is about even. The unemployment rate peaked at 10.2 percent, and I will be surprised if we see a number significantly greater than this in the months to come as the economy continues to pick up steam.

It appears the worst is over from a macroeconomic point-of-view.

That said, recovery takes time. The unemployment rate will fall but at a frustratingly slow pace, especially for those who have been jobless for a long period of time. State and local government budgets will continue to be tight as tax revenue, much like the unemployment rate, lags economic activity. Of course, the federal government has an “advantage” in its ability to run deficits, but most other jurisdictions must balance their budgets.

Stay optimistic – it will be morning in America again soon.

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