Monthly Archives: January 2009

Thinking About the New Year

Each January I am energized by the prospect of fresh new ground to plow (metaphorically speaking) in the capital markets. Although long-term investors need not mark the passing of an old year in any special way (if you think about it, December 31 is no more special than July 4 or any other day for the long-haul investor), we tend to do exactly that. Along with all of the traditional holiday trappings which accompany the end of the year, we also see the obligatory forecasts from Wall Street strategists giving their best guesses for the new year. I often wonder why in our industry we tout the virtues of investing for the long run and we (investment professionals) send out quarterly performance statements!

So here we sit with most of 2009 still ahead of us and the train wreck that was 2008 still etched in our minds, ringing in our ears, and still visible in our rear view mirrors and yet I feel somewhat hopeful and quite positive. Granted, the news on the economy is unlikely to be anything but horrid for a while, but eventually this too will improve. More important than the headline news on how the economy is doing, is what we are seeing at the micro level at corporations. Although the bulk of corporate activity is still mostly negative, we are seeing some very early, very preliminary signs that inventories are being worked through and that here and there we are seeing a few new orders. This is probably not enough to make the front page (after all gloom and doom still seems to sell newspapers), but it may be something for the stock market to begin paying attention to.

Perspective on the Employment Report

This morning the US Labor Department reported that 524,000 jobs were lost in December and that the unemployment rate rose to 7.2%. Expectations had been for around 550,000 jobs lost and a rate of 7.0%. The job loss figures for October and November were both revised upward. Despite these numbers, the stock market has opened mixed – suggesting that these figures are not significantly out of line with expectations.

The media seems to have difficulty in putting these figures into any kind of context. They seem to suggest that evil forces are at work oppressing the US worker ; they try to portray a sense of hopelessness and futility and point to the government as the “only hope” for the American worker. Clearly, this is nonsense. Recessions come and go and one of the benefits of them is “creative destruction.” Companies and industries which are no longer competitive will fail in a recession. The human and financial capital, management talent and creativity which was formerly deployed in these efforts will find new areas to bloom. I often think of the imagery of the dinosaurs being lead to extinction by some catastrophe followed by the emergence of small, furry mammals as the dominant form of life on earth.

The US economy has a rich history of entrepreneurship and this allows the nations to rebound quickly from financial and other crises. Most commentary today suggests that the current recession will be a long one (16 months or so), but that means that it should be ending sometime in the summer. This is consistent with James Swanson’s view. It’s to reflect on the idea that the stock market usually tries to discount the future. We also know that bear markets always end during the recession (it’s happened every time since 1929). These two facts suggest the equity market has the potential to be the best place to put one’s money right now.

One final comment about the employment report from the New York Times, “But for all the job losses, the current recession, now in its 14th month, falls short of the mid-’70s and early ’80s recessions, at least so far. The total number of men and women at work declined 2.7 percent in the 1974-75 recession and by 3.1 percent in 1981-82. In the current recession, the loss through November was under 2 percent.” It’s also good to note that the December employment report was marginally better than November’s.

Some might look at this and think, “Well, things can get a lot worse.” I would submit that the fundamental nature of the economy is different now vs. then – the economy is much less linked to energy consumption and manufacturing and more export and service oriented. This suggests a greater resilience to cyclical forces (it’s easier to re-train service workers than factory workers, for example) and a resumption in growth in large developing nations such as China and India may provide a much greater benefit to US mulit-nationals than would have happened in the 1970s or 1980s.

We can expect much of the economic data to be reported over the next few weeks and months to show a weak economy. I would be surprised to see the majority of data suggesting a weakening economy. Remember that the stock market does not need good news to recovery, but simply news that is “less bad” than before.