Market Minute – March 10, 2013
It is nice to see the winter finally start to come to a close, with daylight savings restored this morning, the foot of new snow in my front yard notwithstanding. Less pleasant that the onset of spring is the reaction to Friday’s unemployment figures. I fear that we are seeing a repeat of the market myopia that so widely devastated portfolios in the last financial crisis.
By all means, the report on Friday – a gain of 236,000 jobs for the month of February – is a welcome sign. Construction spending and hiring continue to increase at a vigorous pace, and the medical industry leads the hiring trend. But the figures still reflect a troubled situation.
The unemployment rate reflects only those who are looking for jobs; another 130,000 people chose to leave the workforce, hastening the decline in the unemployment rate. And an equally important measure is the long-term unemployed, which increased to 4.8 million people, or 40% of those reported as unemployed. Furthermore, the gains in February are tempered by a downward revision of 38,000 fewer jobs in January, which was already a weak month.
We need 150,000 new jobs a month to maintain stable employment given population growth – a level we have yet to maintain during this recovery. During the financial crisis, we lost over 7 million jobs, which we have not begun to restore, factoring in population growth since then. Certainly the momentum is in the right direction, but it has been five years since the recession began, and we are only beginning the process of restoring lost jobs and incomes.
When we factor in mediocre economic growth of around 2%, the impact of the sequester cuts, and the consumption-dampening effects of higher gas prices combined with a payroll tax increase, we can see that we are still skating on extremely thin ice in the short-term.
Yet, the stock market has reached an all-time high.
The disconnect is a result of the Fed’s $85 billion monthly monetization program. By “printing” money in such vast quantities at a sustained rate, they are able to inflate the various markets beyond values that reflect the true economic risks. Yes, companies are profitable and cash is abundant on their balance sheets, but the prospects for strong continued growth are dubious at best. We need some impressive magic to make it all work in a way to support these values. Anything short of magic will be another collapse.
As with every other asset bubble human emotion reigns – with a healthy dose of marketing. The financial media loves to fixate on stock prices and stock highs. You cannot walk 50 feet in today’s cities without seeing some headline, quote or other reminder of the stock market and the related hype. With the strong propensity for people to forget past events and fixate on the immediate market news, the bubble has plenty of fuel to grow to dangerous proportions.
How we proceed from here is with caution. What we need to remember is that volatility will remain, and until we fix the more pressing issues these market highs are not likely to persist. As a reminder, our investment strategy reflects these risks through a broad asset allocation that enables growth from stocks as well as several other asset classes. The success of this long term approach will fluctuate with market distortions, but it is a steady perspective that favors stable growth over extreme highs and lows.
David B. Matias, CPA