Despite stretched market fundamentals and less than robust economic readings, the S&P 500 on a total return basis advanced 3.7% for the month of September. As of the close on October 20, 2009, the S&P 500 stood at 1,092 down (43%) from its October, 2007 peak and ALL-TIME closing high of 1,562. In this bear market rally, the S&P 500 has now advanced a remarkable 61% from the bear market cycle closing low of 677 on March 9, 2009. At this level the S&P 500 is trading at 20 times 2009 estimated operating earnings (PE ratio) of $55 and 22 times 2008 actual operating earnings of $50. The 2009 PE ratio of 20 times is above the historical average multiple of 15 -16 times operating earnings and suggests the S&P 500 is trading significantly above fair value, particularly if one considers the awful employment picture. With 70% of U.S. GDP derived from consumer expenditures, it is quite amazing that the S&P 500 can rally more than 60% while employment continues to roll over and delinquencies and defaults on mortgage and consumer debt accelerate.
While the stock market has headed further northward in September and October the employment picture headed further south. In fact, the Bureau of Labor Statistics (BLS) recently released employment statistics for September which were far worse than expected. Nonfarm payroll jobs declined 263,000 in September compared to an expected decline of 175,000. Economists and Wall Street strategists had been taking comfort because job declines had been improving sequentially (i.e., still negative but less so) over the summer months, but September showed sequential deterioration for the first time since May. The unemployment rate grew to 9.8% in September, the highest level since December 1982 when the rate was 10.8%. Although initial jobless claims have peaked, the real issue has been that there is no visible pickup in hiring. For every company in the BLS survey adding to staff, there were more than two firms cutting back. The average duration of unemployment rose to 26.2 months in September, a full half year! The more inclusive U-6 measure of employment (which includes part-time workers looking for full time jobs and those discouraged individuals who have stopped seeking employment) also reached a new high of 17% in September. Worse yet, 7.2 million Americans have lost their jobs since the business cycle peak in December 2007. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) has designated December 2007 as the most recent cycle peak. NBER has not yet determined an endpoint for the recession that began in December 2007.
Despite Federal Reserve Chairman Ben Bernanke missing the call on the front end of this recession (he was denying a recession was underway well into 2008), it appears that there has been a lot of faith placed in his mid-September call that the recession had come to an end consistent with his "green shoots" prophecy of mid-March 2009. The gullible U.S. media produced easily, consumable headlines for the masses like "Bernanke: Recession Likely Over." To be fair, Mr. Bernanke's full statement which included some cautionary statements follows:
"Even though, from a technical perspective, the recession is very likely over at this point. It's still going to feel like a very weak economy for some time, as many people still find their job security and their employment status is not what they wish it was. So that is a challenge for us and all policymakers going forward."
My tongue in cheek translation of Bernanke's speech is as follows:
"As Fed Chairman, I can assure you that the highly managed government GDP statistics for the third quarter of 2009 will definitely be positive. This will signal to the masses that the recession is "technically" over and take some pressure off of me. The economy will remain very weak for some time however. It will not seem like a recovery to the millions of unemployed and underemployed Americans "wishing" for full time employment. It is on behalf of these American dreamers that we must continue to promote my "green shoots" prophecy if we are to have any hope for a true recovery. So that is a challenge for us and all policymakers going forward."
Beware of false prophets as well as false profit projections. Be vigilant. Analyze the potential outcomes. If these prophecies prove true, you may miss an opportunity. If false, you could lose precious investment capital ahead of more tumultuous economic conditions. Risk remains very high.
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