General Market Comment: October 5, 2009
Last week was full of economic data. This week will be full of earnings data as the Q3 earnings season gets kicked off. The market has had a pretty run of the mill correction so far – not unlike what preceded the Q2 earnings season. The labor numbers last week has some pundits lamenting continued economic weakness. Remember that labor numbers lag other economic indicators. I have a few charts on last week’s data and some items on the coming quarter that follow below.
The first chart to consider is an update of the ISM survey results for manufacturing businesses. Specifically it addresses the trend in new orders and employment. Some of you may recall my prior work that shows that rising new orders has led to rising employment. While these data series can be volatile the picture is one of recovery. We will see the non-manufacturing data reported this week.
Another look at the labor situation comes from the Carpe Diem blog of Mark Perry. Mark points out that not only have Initial Jobless Claims started to decline they are relatively modest in terms of the percentage of the labor force compared to the deep recessions of 1974-75 and 1980-82.
Mark described the situation as follows . . . “This measure of initial jobless claims, adjusted for the size of the U.S. labor force, shows that jobless claims peaked during this recession above the levels of the last two recessions (1990-1991 and 2001), but were never anywhere close to the levels of the previous three recessions in the mid-1970s and early 1980s (see chart above) . . . . In other words, this recession was worse than the last two, but not nearly as severe as the previous three, using this adjusted measure of jobless claims. . . Finally, the current level of 0.3634% for jobless claims as a share of the September labor force is above the level at the end of the 2001 recession, but is very close to the levels that marked the ends of the four previous recessions (see dashed blue line in graph above)..
Some of you might be alarmed that the recent sell off in the stock market wiped out the September gains. The analysts at Bespoke Investment Group pointed out that October has started with one of the weakest market performances since the Depression. In fact the drop last Thursday was the 4th weakest since 1928. Sounds scary huh? Not to worry my friends – I went back and checked on the Q4 performance for S&P 500 for all the 10 instances Bespoke identified and found that in all but one instance the market went on to rise in the fourth quarter. The only time the market didn’t go up after an unusually weak October start was 1931. The last time we had a really weak October start was 1998. In fact, the start to October 1998 was the weakest in modern market history. The S&P 500 went on to rise 21% in Q4 1998.
It would take a severe economic reversal – not just a slow down – a reversal – of the multiple economic indicators and earnings to prevent Q4 from seeing a positive market move. I have displayed the Q4 experience for the S&P 500 since 1945 below. Q4 has been a plus quarter 78% of the time since 1945 and 84% of the time since 1980.
The recent correction in the market has so far been unremarkable, highly anticipated and timely. The earnings reports in the coming weeks will set the tenor for Q4 market performance. There are no rose colored glasses on Wall Street this quarter so the odds favor better than expected earnings reports. The drop in the market may provide money managers the justification to put money to work to try to catch up with the market performance year to date.