Economic Conditions Dictate Cautious Movements

Article excerpt

An old line about employment and the economy says that when your neighbor loses his job, the economy is in a recession. When you lose your job, it's a depression.

If so, then last month, 93,000 more Americans were in a depression. Eighty thousand jobs evaporated last month and revised data showed 13,000 more job losses in the prior month than originally estimated. The unemployment rate rose to 5.1 percent, an increase of 0.3 percentage points.

Uncle Sam eased the job pressures by adding 18,000 jobs, but as some people sarcastically might point out, there never is a recession in the Beltway area.

The latest employment report merely was another in a string of weak economic data. The jobs report has a streak of its own going, with last month bringing the third consecutive monthly decline in the overall jobs situation and the fourth straight drop in private payrolls.

Stuart Hoffman, PNC Bank's chief economist, said in a recent interview, "If ever you were going to ring a bell on recession, these numbers (the last employment statistics) ring it."

But from a stock market standpoint, does it matter?

The unemployment rate is the highest since September 2005. Back then, the market did not seem to care as the economy was in high gear.

You would think, however, that the highest unemployment rate in the last 18 years, posted in June 1992, would have been a major market negative, but you would have another think coming.

Assume that you are 100 percent certain that the unemployment rate will rise for the next 16 months and that it will take 34 months before nonfarm payrolls would match the level of one month ago. Would you buy stocks?

If you had said no to this question in 1991 when these employment conditions existed and instead waited for the data to improve before you owned stocks, by the end of 1992, you would have missed a 27 percent advance in the Standard & Poor's 500.

Studying history to find clues as to how the economy and the market might react in certain circumstances can be worthwhile as long as you remember that no two periods are identical. …