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
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 behind 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 -- 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 5-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 |
16 months (so far) |
(4.5%) (so far) |
??? |
Source: Bureau of Labor Statistics.
And herein lies the opportunity. Clearly, this has been a deep recession -- in August, we experienced a 4.5% year-over-year drop in employment. Yet the yearly decline was only 4.4% in September and 4.2% in October, suggesting the rate of job losses has slowed.
Unfortunately, the market has already rallied considerably from its lows in March. It's hard to say whether stocks remain attractive at these levels, but history has shown that buying during economic contractions when the market is reaching new lows is a savvy strategy.
If the economy does rebound quickly, we may look back on financials like American Express
The next step
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This article was first published Jan. 31, 2009. It has been updated.
Andrew Sullivan enjoys analyzing employment data and owns American Express call options, but owns none of the other stocks mentioned in this article. Costco Wholesale and PACCAR are Motley Fool Stock Advisor recommendations. American Express, Costco Wholesale, and Coca-Cola are Inside Value recommendations. Coca-Cola is an Income Investor selection. The Motley Fool owns shares of Costco Wholesale. The Fool has a disclosure policy.
