Trader’s Narrative

This bear market we’ve just had (is it over?) has been one fit for superlatives. So why not its inevitable counter-rally (or is it a bull market?).

The chart below is from economist David Rosenberg who now plies his trade at Gluskin & Sheff. In it he points out that what we’ve seen since the spring of this year is the Sharpest Equity Market Rally Ever in the Context of Pricing Out of the Recession:
(Click to see a larger graph open in a new window)

That’s a 54% rise from March 9th 2009 to September 11th, 2009. The closest rally in comparison is 44% in 1929-1933.

Is this recession over? No one really knows. But the sharpest rally ever from within a recession is just one more notch in the belt of this bat$hit insane market.

I, for one, look forward to becoming a curmudgeon and poking my grand kids with my walnut walking stick as I regale them with tales from the bear markets of 2000 and 2008.

No doubt, you’ve probably seen a chart of the unemployment rate recently. And you know about the surprise dip in last month’s unemployment rate.

By the way, that reduction has been roundly dismissed as a statistical mirage because more than not, it was caused by people who gave up looking for a job, rather than people actually finding a job.

If you think the level of unemployment is alarming, you’ll find the chart of the average duration of unemployment in weeks downright frightening:

Source: St. Louis Fed

The shaded bars, of course, represent instances and durations of recessions as determined by the NBER.

Since the Department of Labor started collecting data for this statistic in the late 1940’s, we haven’t seen unemployment last this long. The latest data is for July 2009 at 25.1 weeks - in other words, almost 6 months!

No wonder people are giving up looking for work. You would have to have the patience and fortitude of Job to persevere through such a harrowing episode. And remember, this is an average, so there are many who have been unemployed for much longer.

This means that the stock market recovery we’ve seen so far has not only been mostly a profitless, revenue-less one but also it is shaping up to be a jobless recovery. But then again, the stock market is famously supposed to be ahead of economic measures like unemployment.

Take the previous highest peak in the average duration of unemployment: July 1983 at 21.2 weeks. If we travel back in time to those days, it isn’t hard to imagine that we would be equally frightened at this statistic. However, thanks to hindsight we now know that by July 1983 the stock market had already bottomed and gone on to gain an astonishing 70% (for the Standard & Poor’s 500 index). So far, we’re only up about 45% since the March 2009 bottom - if it is indeed the floor.

So while the above chart may send a chill down everyone’s back about the health of the US economy, it doesn’t mean that the stock market is on borrowed time. More importantly, how can anyone look at it and still be worried about inflation?

Despite all the stimulus, the US economy is far, far away from reaching capacity and inciting inflation worries. I guess that is the narrow silver lining in this dark cloud.

Late last year, in December, the National Bureau of Economic Research (NBER) officially set the start of the current recession as of December 2007. So basically, it took them a whole year to come to the same conclusion that I did almost immediately: We are in a recession!

This current recession has brought with it many unique economic and market based statistics. Among them is the distinction of being the first recession since World War II which has included two back to back quarters of positive GDP growth. The economy expanded at a 0.87% in the 1st quarter of 2008 and 2.83% in the 2nd quarter.

Today’s announcement from the Labor Department that the unemployment rate had actually fallen from 9.5% in June to 9.4% in July surprised many. Payrolls came in at -247,000 in July - the consensus was at -325,000. It is the first time since April 2008 that the unemployment rate has decreased. Here’s a chart of the unemployment rate since 1948:

Source: Chart of the Day

Since 1948 there was only one occurrence of a higher unemployment rate: June 1982 to June 1983. Although this small decrease and the elevated level of the unemployment rate is providing reasons for many to foresee the end of the recession, there are two reasons why we may see even higher unemployment in the near future.

First, a one-month decline in the unemployment rate (even a small decline) after a significant spike (i.e. the unemployment rate spikes by 1.5 percentage points or more) has tended to occur slightly after a recession had ended.

Second, the small and surprising decrease in unemployment may not be a sign of economic strength but merely based on the fact that many are simply giving up looking for work and therefore are no longer counted as being unemployed.

Here’s a chart of the employment to population ratio which has fallen to a 25 year low of 59.4%:

More than a year ago I called it: We are in a recession!

It was rather foolhardy to go out on a limb like that but with the help of hindsight we now know that that was quite a prescient call. What I didn’t expect was that we would be entering one of the most serious recessions we’ve seen in recent history.

Since the National Bureau of Economic Research has been keeping track of them, we’ve had 22 recessions (including this one). However, only 4 have been longer in duration:

Source: Chart of the Day

It may be just as foolhardy to now do an about turn and declare that the ‘Great Recession’ is over. But we are seeing some indications of that. The bad news is that the sharp contraction in inventories that we’ve seen has been unprecedented in recent economic history. The good news is that such drawdowns have historically signaled the end of recessions:

Souce: Doug Kass at theStreet.com

While the stock market has perked up slightly, the economy continues to be mired in a deep recession. Unemployment, housing and other measures are still negative with no real sign of improvement.

Since 1900, there have been 22 recessions which works out to one about every 5 years. While recessions are labeled officially by the NBER, in January 2008 I pointed to a specific indicator which I believed meant that we were in a recession (by late 2007). A while later, this was confirmed by NBER.

Here’s a chart of all US recessions since 1900 and their length:

Source: Chart of the Day (using data from the National Bureau of Economic Research)

The outlier, of course, is 1929. The G-20 leaders huddled together in London to do everything to keep it an outlier and prevent an equally devastating world-wide depression..

At the start of the century there was a cluster of long recessions. These 5 recessions all happened before 1930 and were also the longest in length. The next 70+ years saw much shorter recessions.

Although you may think this was due to the institution of the Federal Reserve and its role in managing the economy, you’d be wrong. The Fed was created in December 23th, 1913. It was the SEC that came about as a result of the chaotic aftermath of the 1929 crash and ensuing depression.

Here’s a chart showing the relationship between the unemployment rate and the stock market during the past few recessions. Notice how the “bad news” of a rising unemployment rate accompanies a rising stock market. In other words, the market discounts the future and starts to rally well ahead of the turning point in the economy.