The first quarter of 2012 was a stunner in the equity markets, giving us the best first quarter since 1998. And that raises the question: What did 1998 look like relative to 2012?
Table 1: A Little Comparative Economic History
1998
2012
Sector trends
Beginnings of an enormously impactful Internet revolution
Banking sector still struggling, corporation cash at record levels in response to continued economic uncertainty coupled with political volatility.
Federal government spending
Relatively controlled with a surplus of 0.7% of GDP
The highest percentage of GDP in history outside of a world war with a projected budget deficit nearing 9% of GDP
Federal politics
Stable
Infighting of Montague and Capulet quality
Economic growth
Sustained 4+% of GDP
Under 2%, weak, and slowing
Industry capacity utilization
82.8%
78.4% (significant excess capacity)
Housing
Strong and growing
23% of homeowners are underwater, prices still falling, and a mortgage process more invasive than a colonoscopy
Labor markets
Unemployment at 4.5% with 67.1% of the population employed
Unemployment at 8.3% with 63.8% of the population employed
Consumer confidence
Conference Board measure 131.7
Conference Board measure 70.2
Central Bank
Stable and predictable with a balance sheet of $500 billion rising at 5% annual rate
Unpredictable and in uncharted territory with a balance sheet of more than $3 trillion rising at a 20% annual rate
Inflation as measured by CPI
1.6% (significantly less than GDP growth)
3% (above GDP growth)
We must also take into consideration the weather, which has given us not only an exceptionally warm January and February, but also a March that was reportedly the warmest on record. In addition, the Easter Bunny is arriving this weekend, two weeks earlier than last year. Easter is the third-biggest buying holiday in the US, behind only Christmas and Valentine's Day, so that is likely to help support economic data in the coming weeks.
If we look a little deeper at the markets, Apple Inc. (Nasdaq: AAPL) rose 48% in the recent rally and is responsible for nearly 20% of the appreciation in the S&P 500. It represents 4% of the S&P 500 market capitalization and 11% of the Nasdaq. Divergence is everywhere, meaning there is no clear, consistent trend, despite the headlines. Small and mid-cap stocks, the broader NYSE composite, transports, the Baltic Exchange Dry Index, and Treasury yields have not made new highs, contrary to what would be expected in a true bull run.
With first-quarter earnings season barely a month away, the stock market will need to see $108 of operating earnings per share from the S&P 500 to justify the market at its current price-to-earnings level. The current consensus calls for $105, and my calculations tell me that figure is overly optimistic.
Bottom line: Don't let the tail wag the dog. The markets have become increasingly dependent on monetary stimulus while often disregarding economic and investment-specific fundamentals. The minutes the Federal Open Markets Committee released this week from its March 13 meeting revealed that it believes the economy is strengthening. That assessment led the markets to believe another round of quantitative easing is less likely. Stock indices immediately turned downward, and volatility rose. We work within markets in which bad news is good and good news is bad. When the markets do not reflect the same reality as the macroeconomic fundamentals, guess which one eventually wins?
This is a good analysis and comparison to the last really good market. I think in the end, fundamentals will win out. The economy is improving and although some of the markets have gotten ahead of themselves, there is real improvement which will eventually translate into better earnings, which should help the markets move ahread. It will not be a straight line, however, given the lack of vigor in the improvements.
There is no doubt year 1998 is different from year 2012. Stock market of 1998 is a running bull, while stock market of 2012 is dead cat bounce. Hope I am wrong.
We agree. And the timing of the bounce seems to be earlier than the politicains would have liked - it won't be bouncing anymore by the November elections.
This puts the difference in perspective pretty nicely:
There are 242,604,000 Americans over the age of 16 (working age) which means that 36.2% of the population is no longer part of the work force and are "no longer counted".The decline in the labor force participation rate, the lowest level since the early 1980's, is the primary reason for the drop in the unemployment rate.The important difference is that in the 80's the participation rate was rising – not falling.
Yes the drop in people in the labor force is a big factor but I think it is also a perplexing one. I have read a lot of analysis from people trying to figure out what this means. Here are a few of my theories:
1) Young participants leaving the labor force: One component is the "young slacker going home to live with the parents." This is confirmed by a lot of data showing more young people staying at home w/ parents.
2) Another chunk of people are the "too old to get a job but too young to retire" demographic. I personally know a few of these. Let's say you are 62 years old and you were planning to work another five years but the job market has been brutal and there aren't a lot of opportunities for very senior, experienced people. So you end up dropping out of the labor force and retiring because of lack of opportunity.
3) "Back to School." You were in the workforce, recession hit, you tried to find a good job, but didn't like what you saw. So you go back to grad school.
4) Entrepreneur who is "out of the workforce" but not quite "creating lots of jobs yet" because the young enterprise is just squeeking by. Technically you are self-employed and out of the workforce, yeah? This depends on how the government measures this, but the fed job numbers are terrible about measuring entrepreurial activity -- basically they just guess.
These are a few scenarios that are happening anybody have any insight into more?
I am trying to find some conclusive studies on this sort of thing but I haven't seen anyting great, let me know if you see something.
Your first two are big contributors in my experience - the youngest and oldest parts of the workforce are suffering. I would add another category in the middle -
5) Dual-income families dropping to single-income. One spouse loses a job and - knowing about the challenges of the current employment market - decides to stay home and invest their time and effort into something more productive than a fruitless job hunt.
Economists at Barclays Capital issued a report in March that challenges the belief that the unemployment rate is falling because workers have given up looking for a job and have exited the labor force, and that the rate likely will climb again once these discouraged Americans renew their search for a job.
In "Dispelling an Urban Legend," economist Dean Maki argued that the size of the U.S. workforce is shrinking simply because aging baby boomers are hitting retirement age amid a sluggish economy.
He thinks the theory that the unemployment rate will stop falling and start to rise again as people reenter the workforce if the economy improves amounts to an urban legend.
I know several people in their early 60s who retired early, At this point, I doubt they'd resume job hunting no matter what happens with the economy. However, I could see them doing consulting work or starting their own businesses down the line, but you know how hard those jobs are to measure statistically.
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Forget about business growth as long as the future of tax rates remains unclear, regulation continues to expand in unpredictable ways, and legislation keeps creating increasingly onerous burdens.
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