The Good Old Days

Today being Good Friday, a central date on the Christian calendar, the financial markets are closed across the Western world. That won’t stop the wheels of American bureaucracy stop turning, and the Bureau of Labor Statistics will nonetheless publish, at 8.30 EST, the much-awaited date regarding employment and unemployment in March.

These are expected to be strongly positive, showing that for the first time since the recession began in late 2007, the US economy added a large number of jobs. Granted, many of these additions will be either statistical – relating to weather-induced distortions in the February data that will be caught up in March, or temporary – the 100,000 or so government jobs added last month for the purpose of the 2010 census, which will disappear two or three months down the road.

Nevertheless, the financial markets are not waiting for the data to be published in order to celebrate. They have been doing so for some time, and the celebration continued this week. The main share indices in the US have been sluggish, although they heaved themselves up to new recovery highs yesterday, but their European counterparts have been moving higher, faster. However, the link between macroeconomic data and stock prices is tenuous, a best. Indeed, even the link between key parameters of equity valuations and equity prices is dubious. The result is that neither the low-volume rally underway on the stock markets, nor the jobless recovery underway in the US economy, is sufficient to convince serious bears to change their views.

As noted previously in this column, the acceptable, polite face of bearishness is ably represented by David Rosenberg, formerly of Merrill Lynch and now of the Canadian firm, Gluskin Sheff. In one of his most recent missives, Rosenberg discusses the strength of the US equity markets and notes, inter alia, that in a period of a month (now longer), theS&P500 index has not undergone a loss of one percent in a day. He further notes that technical analysts are now talking of the S&P index’s next target as being 1,230 (it was around 1,180 yesterday), at which point it would be back to where it was prior to the collapse of Lehman Brothers. He then goes on to compare  the current levels of no less than 16 economic and financial parameters to their levels in September 2008, that long-ago point of time when Lehman collapsed and the world seemed to fall apart.

Space precludes reviewing the full list, but here are several of the more interesting ones. On the economy, the unemployment rate then was a mere 6.2%, not 9.7% as it was last month (today’s data are not expected to change that, but if they do it will only be by 0.1%); sales of new cars were running at the rate of 12.5 million per annum, rather than 10.3 million; and, apropos the employment data – in September 2008, employment totaled 136.3 million, not the 129.5 million (out of a larger population) currently employed. The housing sector deserves special mention, especially since back then, sales of new homes were running at annual rate of 436,000, whereas the latest data show them at 308,000 – the worst-ever level recorded. The Case-Shiller home price index then was 162, well off its highs, but far better than today’s 146. Against this background, it’s hardly surprising that default rates on residential loans, back in the good old days of September 2008, were 5.3% — not the horrendous 10.1% level pertaining today…

Equity investors will appreciate that the dividend yield then was 2.4%, whilst today it is only 2.0% — but then interest rates have dropped considerably in between. How long interest rates stay low is an open question, but the final data point is not without relevance to the answer: when Lehman collapsed, the American government was running a deficit that in those innocent days was considered enormous — $500 billion. The deficit is now triple that level, at around $1.5 trillion. Justified or not, the stock market is about the only important area of the economy with even a chance of regaining its pre-Lehman levels anytime soon.

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