Job Losses, Stock Gains?

Market rallies after big payrolls declines may be a sign that investors anticipate an eventual economic recovery after the bad news is out

On Fri., Dec. 5, the U.S. Labor Dept. reported the loss of more than a half million jobs during November (, 12/05/08), the largest decline since the 1974-75 recession. In addition, October and September's jobs data were each revised sharply lower. Finally, the unemployment rate rose to 6.7% from 6.5%.

In addition to the mounting job losses, the National Bureau of Economic Research earlier in the week declared that the U.S. economy is in recession. As expected by S&P Economics, the peak is dated to December 2007, already lasting longer than the average 10 months since World War II.

So far in 2008 the U.S. has lost nearly 2 million jobs through November, putting this year on track as being the worst since 2.1 million jobs were lost in 1982.

Heading into Friday's trading day, it would have been no surprise if stocks had tumbled, threatening the Nov. 20 closing low on the S&P 500 of 752. Yet the S&P 500 ended up rising more than 30 points. Go figure.

S&P 500 % Price Change During and After Job Declines
Cal. Yr. Job Loss ('000s) % Chg. That Yr. % Chg. Foll. Yr.
1945 (2,750) 30.7 (11.9)
1949 (1,512) 10.3 21.8
1953 (463) (6.6) 45.0
1954 (371) 45.0 26.4
1957 (545) (14.3) 38.1
1958 (297) 38.1 8.5
1960 (432) (3.0) 23.1
1970 (450) 0.1 10.8
1974 (378) (29.7) 31.5
1981 (52) (9.7) 14.8
1982 (2,128) 14.8 17.3
1991 (857) 26.3 4.5
2001 (1,762) (13.0) (23.4)
2002 (540) (23.4) 26.4
Average (896) 4.7 16.6

Source: S&P Equity Research. Past performance is no guarantee of future results.

Then I remembered some data shared at a recent Investment Policy Committee (IPC) meeting by Rich Peterson of S&P's Markets, Credit and Risk Strategies group. Not surprisingly, during the year in which job losses mounted, the S&P advanced an average of only 4.7% and fell in seven of 14 observations. In 12 of the subsequent calendar years, however, the S&P 500 posted increases—10 of which were double-digit advances—that averaged 16.6%.

Of course past performance is no guarantee of future results, but the implication is that investors anticipated an eventual economic recovery by buying back into stocks following large declines in employment.

After suffering through a full-year decline of more than 40%, it's easy to see why some investors believe this bear will envelop all of 2009 as well. We don't. S&P expects this recession will bottom in mid-2009, after setting a post-war record for duration. S&P's IPC projects the S&P 500 to close 2009 at 1025, for a 20% rise from the expected 2008 close of 850, on an expected recovery in economic growth from massive government stimulus and a gradual improvement in corporate earnings outlooks.

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