Is This the Next Incredible Buying Opportunity?

Do you know the five best years to have bought stocks in the past four decades? They were 1974, 1982, 1987, 1990, and 2002.

Had you the foresight to buy stakes in high-quality companies such as Coca-Cola (NYSE: KO  ) , General Electric (NYSE: GE  ) , and Lowe's (NYSE: LOW  ) at some of those major market bottoms, you could be sitting on a small fortune today. Warren Buffett laid the groundwork for his stunning performance in 1973, buying Washington Post (NYSE: WPO  ) shares for $11.38 each; those shares now trade for more than $400. 

It turns out that there's a common thread among four of the years (excluding 1987). Although no indicator can consistently predict the market's performance, this particular trait has coincided with four of the five best investing opportunities in the past 40 years.

Even better, this indicator suggests that we may be in one of those rare periods right now. But before I show you the data proving that point, let me explain what this indicator is.

Keep it simple
The number is the Bureau of Labor Statistics' measurement of U.S. employment. It's the most basic statistic out there -- an estimation of all of the nonfarm salaried jobs in America. Like any statistic, it has limitations, one of which is that it does not count the self-employed. But it is an excellent measure of the health of the economy and is more than adequate for our purposes. 

The reality behind payrolls 
Here's how the market gets it wrong. Usually you'll hear something like "the economy gained 123,000 jobs in May, below the consensus forecast of 135,000." This is precisely the wrong way to think about the employment number. It shifts focus from the broader trend to the short term. The right way is to look at the year-over-year change -- how are we doing this year compared with last year? 

Given normal population and economic growth, there is tremendous upward pressure on U.S. employment numbers. Each year, you should see an increase of some sort -- typically on the order of 1% to 3%. In this situation, there is no reason to pay attention to minute changes in the number.    

The time to perk up is when employment numbers shrink year over year. Why? Because when that happens, the economy is contracting, and when the economy contracts, the stock market generally does, too. No one likes to see people lose their jobs, but these are the most lucrative times for investors.

It's borne out in the numbers. Each of the best buying opportunities -- 1974, 1982, 1990, and 2002 -- witnessed protracted declines in employment. Jobs were being lost left and right, and the economy was in the midst of a painful contraction. Anyone remember 1982 and the severity of that recession? This year feels pretty similar -- wide-moat businesses such as American Express (NYSE: AXP  ) and solid banks such as Wells Fargo (NYSE: WFC  ) and BB&T (NYSE: BBT  ) trade at multiyear lows that are symptomatic of a terrible economy.

But there's a silver lining …
Two, namely:

1. Contractions are usually overcome within a few years.

2. Alert investors who bought during those contractions had the chance to make a lot of money.

Period	Length	Maximum Decline	S&P 500 Five-Year Return From Bottom
1974-1975	12 months	(2.7%)	66%
1981-1983	18 months	(2.7%)	225%
1991-1992	15 months	(1.5%)	96%
2001-2003	29 months	(1.6%)	101%
2008-2009	6 months (so far)	(1.9%) (so far)	??

Source: Bureau of Labor Statistics.

Most everyone is aware this recession could be a painful one. But not everyone is aware that, like past contractions, this could be one of the greatest buying opportunities in years.

The next step
Even if this appears to be a good time to invest, how should you do it? At Motley Fool Inside Value, we recommend focusing on companies with:

• Strong balance sheets.
• Significant competitive advantages.
• Reasonable to excellent valuations.

Our job is made a lot easier today when so many high-quality stocks are on sale. If you'd like to receive our full list of recommendations and our five official best ideas for new money now, click here for a free 30-day guest pass to Inside Value.

Andrew Sullivan owns none of the shares mentioned. American Express and Coca-Cola are Inside Value recommendations. BB&T is an Income Investor selection. The Fool owns shares of American Express. The Motley Fool has a disclosure policy.