By William Patalon III
Money Morning/The Money Map Report
The latest unemployment statistics show that the U.S. recession is winding down – or is over altogether.
If you had to read that sentence twice to make sure you read it correctly, don't feel bad – you're probably not alone. After all, U.S. unemployment statistics haven't been this bad for decades, and they're only expected to get worse.
According to the latest government statistics, the U.S. unemployment rate is 9.5% – a 26-year high – and some analysts say it could spike to 12%. And when the U.S. economy does turn around, the jobless situation may not improve all that much, or at least not all that quickly, since a so-called "jobless recovery" is a virtual certainty.
So just how much can unemployment statistics tell us about the end of the recession, and about the possible outlook for U.S. stocks?
In a word: plenty, concludes new research by Bespoke Investment Group LLC.
"For the last couple of weeks, we have been highlighting how the recent trends in initial jobless claims suggest that the recession is over or winding down," Bespoke wrote in a new research report. "However, there remains a considerable amount of skepticism towards the market's rally. Critics contend that any meaningful rally cannot occur until the economy improves. With jobless claims still at high levels, they claim we have not reached that point."
But jobless statistics say differently. Since peaking in April, the four-week moving average of initial jobless claims has dropped more than 15%. That's actually a bigger decline in jobless claims during a recession than in any of the other six economic downturns recorded since 1969.
In other words, in the other downturns, Bespoke measured the percentage decline in initial jobless claims from their peak until the recession officially ended. That hints strongly that the current recession is over – or at the very least is at or near its end, Bespoke said.
Wither U.S. Stock Prices?
With such an upbeat outlook for the U.S. economy, investors probably can't help but wonder what that means for U.S. stock prices. And that's a good question, Bespoke researchers say.
The Standard & Poor's 500 Index yesterday (Monday) topped the 1,000 mark for the first time in nine months, the latest leg of a powerful rally that's seen U.S. stocks zoom off their lows of early March – restoring $3.7 trillion in shareholder wealth in the process, Bloomberg News reported.
Since bottoming out at 676.53 on March 9, the S&P 500 has soared 48%, closing at 1,002.63 yesterday.
Despite the power of this rally, stocks have truly climbed a "wall of worry," as investors continued to express concerns about the state of the economy, about the potential for, first, deflation and, more recently, inflation, and about the possibility that even after it recovers, the U.S. economy would succumb to these forces, and drop into a "double-dip recession."
Late last month, in fact, Harvard University economics Professor Martin Feldstein warned that the U.S. recession might not be near its end, even noting that there is a real risk the economy may experience a "double-dip" contraction.
"There is a real danger this is going to be a 'double-dip' [recession] and that after six months or so we'll have some more bad news," Feldstein, a Reagan administration advisor who is also a former head of the National Bureau of Economic Research (NBER), told Bloomberg Television. "We could slide down again in the fourth quarter."
Although recent economic reports have been largely positive, Feldstein said that "there isn't going to be enough to sustain a really solid recovery," which is why he believes the U.S. economy could "flatten out" or "even be positive" in the third quarter – before contracting in the year's final three months as the effects of stimulus spending wear off, leaving nothing to carry the economy forward.
However, it's important to note that the stock market is forward-looking, meaning today's prices are a largely a reflection of future expectations. With such a huge run-up from its lows of early March, has the S&P already priced in the anticipated economic rebound? Only time will tell, but even here perhaps history can be a guide, the Bespoke researchers found.
In each of the six recessions before this one, Bespoke measured how long it took for initial-jobless-claim-filings to drop 15% from their peak – as well as how the S&P 500 performed during the decline.
From there, the researchers measured the S&P 500's performance at intervals of one month, three months, six months and a year. Here's a summary of how stocks did during those five periods measured, showing the average return of the six prior recessions, as well as the best and worst performances for each category:
- Filings Peak to 15% Decline in Jobless Claims Filed: Average S&P return for all six prior recessions was 5.89%, with a best of 22.58% and a worst of (-8.21%). It's worth noting that the S&P gained 16.23% this year during the time it took for initial claims to drop 15%.
- One Month From Time 15% Decline in Jobless Claims Reached: Average S&P return for six prior recessions was 1.59% (remember, this is only one month – for an "annualized return, multiply it by 12), with a high of 7.04% and a low of (-6.75%).
- Three Months: Average return was 5.55%, with a best of 16.79% and a worst of (-8.91%).
- Six Months: Average return for this period was 7.5%, with a best of 26.37%, and a worst of (-13.60).
- One Year: Average S&P 500 return for this period was 9.19%, with a best of 36.83%, and a worst of (-21.76%).
Whatever the outcome, this is one market rally that's definitely worth watching.
News and Related Story Links:
- Money Morning News Analysis:
Unemployment Rises, Payroll Losses Far Exceed Analysts' Estimates.
- Money Morning:
U.S. GDP Contraction Slows, but the Road to Recovery Will Be Rocky.
- Money Morning Mid-Year Forecast Series:
Stormy Mid-Year Employment Outlook Leaves Investors in the Dark About the Economy's Second-Half Prospects.
- Bespoke Investment Group:
Official Web Site.
- Bloomberg News:
Stocks Rise as S&P 500 Tops 1,000 for First Time in Nine Months.
'Stockmarkets climbing wall of worry.'
- Bloomberg News:
Harvard's Feldstein Sees Risk of 'Double-Dip' Recession in U.S.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.