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 Berkshire Hathaway
It turns out that there's a common thread among four of the years (all but 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.
How to profit from payrolls
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.
Given normal population and economic growth, there is upward pressure on U.S. employment numbers on the order of 1% to 3% per year. The time to perk up as an investor is when employment numbers shrink year over year, and, specifically, when they shrink at lower rates than they did the prior month.
This is because each of the best buying opportunities -- 1974, 1982, 1990, and 2002 -- were in the thick of large and protracted declines in employment. Unemployment soared and our economy suffered through painful contractions. When that happens, the stock market generally contracts as well. But buying in the eye of the storm has proven very lucrative over the long run, as this table shows:
|
Period |
Length |
Maximum Decline |
S&P 500 Five-Year Return |
|---|---|---|---|
|
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 |
12 months (so far) |
(4.3 %) (so far) |
??? |
Source: Bureau of Labor Statistics.
A weak June
After a surprising May when the country lost only 322,000 jobs, June data came in with a loss of 467,000 jobs, which importantly took the year-over-year change down to negative 4.3%, a serious contraction by any measure. In fact, this was the largest contraction since 1949, 60 years ago[a1] . The following chart shows just how quick and severe this recession has been:
|
|
Nonfarm Employment (in thousands) |
Percent Change Vs. Prior Year |
|---|---|---|
|
January 2008 |
138,002 |
0.7% |
|
February 2008 |
137,919 |
0.6% |
|
March 2008 |
137,814 |
0.4% |
|
April 2008 |
137,764 |
0.3% |
|
May 2008 |
137,717 |
0.1% |
|
June 2008 |
137,617 |
0% |
|
July 2008 |
137,550 |
(0.1%) |
|
August 2008 |
137,423 |
(0.2%) |
|
September 2008 |
137,020 |
(0.6%) |
|
October 2008 |
136,597 |
(1%) |
|
November 2008 |
136,013 |
(1.5%) |
|
December 2008 |
135,489 |
(1.9%) |
|
January 2009 |
134,333 |
(2.7%) |
|
February 2009 |
133,652 |
(3.1%) |
|
March 2009 |
133,000 |
(3.5%) |
|
April 2009 |
132,481 |
(3.8%) |
|
May 2009 |
132,159 |
(4%) |
|
June 2009 |
131,692 |
(4.3%) |
Source: Bureau of Labor Statistics.
And herein lies the opportunity. Clearly, this is a deep recession. After all, we've already experienced a 4% year-over-year drop in employment, and we're only a year into it. While the stock 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.
If the economy does rebound quickly, we may look back on Fifth Third Bancorp
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 focus on companies with:
- Strong balance sheets.
- Significant competitive advantages.
- Reasonable to excellent valuations.
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This article was first published Jan. 31, 2009. It has been updated.
Andrew Sullivan loves analyzing employment data but owns none of the stocks mentioned in the article. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation and an Inside Value pick. Johnson & Johnson and Kimberly-Clark are Income Investor recommendations. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.
