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 Procter & Gamble (NYSE: PG), Dover (NYSE: DOV), or even Danaher (NYSE: DHR) 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.

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 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 -- witnessed 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 the following table shows:

Source: Bureau of Labor Statistics.

The May surprise
Which makes the May numbers all that more enticing. For once, it seems, monthly payroll numbers were a positive surprise. May figures showed a loss of 345,000 jobs in March, surprising analysts and, more importantly, slowing down the year-over-year decline in employment. Take a look at the following chart:

Source: Bureau of Labor Statistics.

You can see that while employment is still falling, the rate of decline has slowed. This is important because it may indicate we could be leveling off in terms of job losses. Perhaps there is a light at the end of the tunnel?

Clearly, this is a deep recession. After all, we've already experienced a 4% year-over-year drop in employment, and we're only 11 months 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, we may look back on Marshall & Ilsley (NYSE: MI) and Bank of America (NYSE: BAC) as wonderful buys. But if we aren't out of the woods yet, I'll take my chances with blue chips like spice purveyor McCormick (NYSE: MKC) and conservative specialty insurer Markel (NYSE: MKL).

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.

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.

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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. Markel is a Motley Fool Inside Value pick. McCormick and Procter & Gamble are Income Investor recommendations. The Fool owns shares of Procter & Gamble and Markel. The Motley Fool has a disclosure policy.