The Back Alley Archives

I thought you'd be interested in the following words from a collegue of mine and respected author Nick Murray:





"The Recession: How Bad Is It?"





This is a headline which you can certainly be forgiven for thinking must have come from a newspaper or magazine published in the last few days. Instead, it is the headline for the cover story in Time magazine on January 13, 1992.



And thereby hangs a highly cautionary tale. Before recounting that tale to you, let me invite you to go—right now—to www.time.com, and, where you’re cued to look up past covers, enter that date. It will be well worth your while; I’ll wait here for you.



•••



Quite clever, don’t you think? An apple seller in current (that is, 1992) garb, handing an apple to a well-clad passerby of 1932, in an iconic Depression-era photograph. Indeed, there is only one important thing wrong with this cover, and with the accompanying story: the recession to which it alluded had ended nine months earlier, in March of 1991. (This is not an opinion; it is taken directly from the data kept by our official recession watcher, the National Bureau of Economic Research, and is readily available on that august body’s website, www.nber.org.)



How did Time miss that? Indeed, since the mainstream media never do anything but report back to the masses what we already believe anyway, how was the whole country managing to miss it? For that matter, came the fall of 1992, how was Bill Clinton—faithfully adhering to James Carville’s war cry, "It’s the economy, stupid"—able to trounce George H. W. Bush, who haplessly continued to repeat the incontrovertible fact that the economy was by then expanding quite smartly, and whom nobody believed?









The answer is stark, simple, compelling, and extremely dangerous to today’s investor, sitting on the sidelines in cash, waiting for some real sign that the economy is turning the corner. The reason people remained absolutely convinced that a recession was still raging on—more than a year after it had ended—was that unemployment was still going up. And that’s all the mainstream media would talk about.



The media report unemployment as a coincident indicator of the economy. That is, journalism implies (without ever saying in so many words) that economic activity and employment trends do the same things at the same time, rising and falling together. When this past December’s horrific job loss numbers came out—capping off a year that saw the most layoffs since 1945, when all the defense plants suddenly shut down and furloughed the entire civilian workforce, near about—headlines everywhere screamed, "Job losses stack up as recession deepens." And the whole country nodded sagely, intoning, "Yup; that’s how it works: unemployment still going up, economy still going down." And went back to reading its money market fund statement.



Unemployment has, in fact, historically been a significantly lagging indicator of the economy. Far more to the point, the equity market has usually been a leading indicator of the economy – and particularly of unemployment. The fact is that in all seven previous recessions over the last 50 years, the market turned up, on average, nine months before unemployment peaked, and while recession was still ongoing. (See chart.)



This is not some dry statistical anomaly that entertains economists and has nothing to do with real life. It’s a dire warning to today’s investor, who may be all too susceptible to drinking the media Kool-Aid. If unemployment headlines are your key economic indicator, then using historical averages, you may miss the upturn in the market by something like three quarters of a year. This is not a prediction. It’s a warning.



The most extreme example of this phenomenon is the recession of 1990 - 1991, which spanned the eight months from July 1990 to March 1991, and coincided with the nation’s last real doozy of a banking crisis before the current cataclysm. Right on time—on October 11, 1990—the stock market troughed.



Consider the litany of disaster that befell "investors" who waited until unemployment peaked to invest in equities during this cycle. The market bottomed in October 1990; the economy bottomed the following March; and unemployment didn’t peak until the middle of 1992. In the interim, the market went up about 30%. The single worst thing you could have been watching all through that cycle—the one indicator a slavish devotion to which would have cost you by far the most money—was unemployment.

A couple of important caveats remain to be made, here.



1. After the market turned up in the recession of 2001, which ran for eight months, it then jackknifed and continued lower, brought down by the accounting/research scandals of 2002 even as the economy resumed its expansion. Once again, this essay isn’t stating a rule, nor making a prediction. It’s simply sounding a warning: don’t assume that unemployment still going up tells you that either the economy or the market is still going down. Resist media hysteria about unemployment.



2. Of necessity, the narrow focus of this little essay is timing, and specifically a very common and usually very expensive timing mistake. But, in the larger sense, you shouldn’t be trying to time the economy and/or the market at all. If you’re a long-term investor with long-term accumulation goals and long-term income needs, you should be matching your portfolio to your life expectancy, not to any view of current events.



Economic and market violence tends to telescope our focus down to days, and sometimes even hours. But if you’re looking at a three-decade, two-person retirement, you shouldn’t care about next Friday’s unemployment report, nor how the market will react to it. You should be concerned—very concerned—about how your income is going to rise through those three decades to offset the inexorable increases in your cost of living.



And you’re not going to accomplish that sitting in a money market fund, trying to time a market turn that you’re most probably going to miss—and that, in a very few years, won’t matter anyway.© 2009 Nick Murray. All rights reserved. Reprinted by permission.

so what is the author endorsing? i understand that the author holds little credit to unemployment reports as a key economic indicator as it relates to investing but what else is he saying?

The GDP numbers for the last quarter of 2008 were seriously ugly, that's all I know.  And despite the fact that I hate this TARP program the more I learn about what they did with the money, GDP probably would've been even worse if they hadn't injected all that paper into the banks.

But I'm out of work, so I'm feeling a little bitter about things currently.  Tends to mess with your point of view.