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What a difference a year makes! This time last year the economy was on the edge of a financial precipice and all equity and bond indices, as well as the majority of client portfolios, were down significantly. There were glimmers of hope on the economic horizon but no clear evidence that a turnaround would be sustainable. That is no longer the case. Numerous economic and financial indicators are confirming that an economic recovery is in place and is likely to continue for quite some time. These indicators include meaningful year-over-year improvements in manufacturing, production, consumption and factory orders, as well as a powerful jump in consumer confidence (a 95% increase from a year ago) and a 9.4% increase in the index of leading indicators.
In addition, corporate profits have improved dramatically reducing average price-to-earnings ratios for the S & P 500 from 56.6 a year ago to 23.1 at the end of March, and this in the face of a strongly rising stock market. Moreover the bond yield curve has ‘steepened’ indicating that big money interests are now more confident that interest rate risk/reward parameters have normalized.
Countering these positive indications of progress is the likelihood of a V-type employment recovery but with a long, flat tail going forward, which may well mean that 9+ % unemployment may be with us for quite some time.
The evidence of the longer-term nature of post-recession employment recoveries is beginning to be difficult to ignore. As evidence of this phenomenon, the average number of months required to return to peak employment for all recessions prior to 1981 was 18 months. However, the recovery time for the 1981 recession was 27 months followed by the 1990 recession employment recovery period of 30.5 months and then by the 2001 recession employment recovery time of 46 months. A shift of this nature probably points to major structural differences in the economic base that are difficult, if not impossible to redress absent the application of major policy and economic remedies. Clearly, however, this is not a healthy or positive trend for the nation’s working class.
This underlying trend is exacerbated by the fact that corporations tend to hire full-time employees after all alternatives have been exhausted and only once they are certain of favorable sustainable future sales.
So, though the “investor class” is beginning and can be expected to continue to prosper once again, a large segment of the US population that is ready, willing and able to work will continue to suffer unemployment and under-employment for some time to come.
We believe that the economic recovery is sustainable and that, at this point in the recovery cycle, resources should be allocated preferentially to the energy and energy services, technology, commodities and non-discretionary spending (food, etc.) equity sectors and to high-yield and inflation-adjusted bonds and bond mutual funds. Certain investment companies also have attractive yields and prospects. We will rebalance and reallocate portfolios in the second quarter to reflect these preferences.
Updated on April 25, 2010.
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