Most people would agree that the ability to accurately predict the future would be a very useful skill for a financial planner to possess. Unfortunately, this planner is no better at that trick than anyone else but sometimes just interpreting the available facts can be of value. Along this line, I was struck by the dichotomy between two headlines found on the front page of the April 3, 2009 issue of the Wall Street Journal. One of them states:Recession Jobs Losses Top 5 Millionand the other: Stocks Leap as Fears Ebb.
Although considerable effort is expended suggesting the opposite, I believe that managing investments is actually quite difficult. Over the years, people have had a hard time making good investment decisions for a range of reasons including this example of accurate (but perhaps difficult to interpret) reporting. There’s no denying that our economy is struggling as jobs are still being lost, yet the four weeks ending April 3rd gave us the most dramatic upswing in the S&P 500 for any such period since 1933.
Our country’s economy is always evolving. A “typical” unemployment rate might be around 3% or 4% with headlines suggesting it’s somewhere around twice that today. Those directly affected find themselves in an almost impossible situation but job losses can make things harder for the rest of us too. A reduction of our workforce by a further 3% might presage a similar drop in spending, but looking around Columbus, empty store fronts and delayed construction projects suggest that business is actually much worse than that.
The conservative side of our natures probably believes something like “there’s no such thing as saving too much”. Yet the very significant drop in spending we’re experiencing goes far beyond what might be expected from a three or four percent reduction in employment. This implies that even those who are still going to work are holding back – causing ripples to spread further through the economy. I was talking with an employee at a local business a couple of weeks ago. He said he was not going to take his family on vacation over spring break but planned to remain at home instead. This was not because business was off and his hours reduced but because their backlog was down from three weeks to one week. He was still working full time but was afraid things might get worse and was holding onto his money just in case. Multiply his decision by the number of us still working and you see why business is slow.
So, assuming the Wall Street Journal is the accurate news gathering organization we believe it to be, which headline should be believed; i.e. are things getting worse or better? Since no one can be sure what’s going to happen in the future, professionals sometimes search for guidance by comparing present-day situations with similar times in the past. As I mentioned, we must go all the way back to 1933, around the end of the Depression, to find a stock market jump like we experienced in March & early April. The mid 30’s is one of those periods I study as I try to imagine what might happen in the future. The Depression did not end with that particular market rally, although conditions were certainly improving at the time. Over the years, I have come to think of the stock market as a “leading indicator” for the entire economy, as people attempt to make their investments ahead of a broadly realized improvement in the economy. One of the reasons we were loath to sell securities on behalf of our clients during the market decline was that, having failed to accurately predict the future and forecast the market drop, we didn’t want them to miss out on the recovery that we expected would follow.
Thus, both headlines are “right” and both provide useful information. People are starting to believe that this recession will not slip into depression and things are not going to be better for a while.
