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 Church & Dwight  (NYSE: CHD  ) , Wal-Mart Stores (NYSE: WMT  ) , or even Clorox (NYSE: CLX  ) 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 shares for $11.38 each; those shares now trade for more than $380. 

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. You might have read something Friday to the effect of "the economy lost 663,000 jobs in March, slightly below the the consensus forecast of 688,000." 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 to 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 Costco Wholesale (Nasdaq: COST  )  and Dow Chemical (NYSE: DOW  ) , and solid banks such as Wells Fargo (NYSE: WFC  )  and Commerce Bancshares  (Nasdaq: CBSH  )  trade at multiyear lows that are symptomatic of a terrible economy.

But there's a silver lining ... 
Actually, two:

  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

9 months (so far)

(3.5%) (so far)

??

Source: Bureau of Labor Statistics.

Clearly, this is a deep recession. After all, we've already experienced a 3.5% year-over-year drop in employment, and we're only nine months into it. While the market could go down further, perhaps 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.

This article was first published Jan. 31, 2009. It has been updated.

Already a subscriber to Inside Value? Log in at the top of this page.

Andrew Sullivan is thankfully employed and owns none of the shares mentioned. Costco and Wal-Mart are Motley Fool Inside Value selections. Costco is a Stock Advisor recommendation. The Fool owns shares of Costco. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 04, 2009, at 2:59 PM, madmilker wrote:

    nope! cause no one red....oops! reads the paper anymore......and people don't shop at tat store with tat STAR above the door......oh! and white is out.

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