Dr. Duru Becomes A Lagging Indicator

By Dr. Duru written for One-Twenty

May 8, 2009

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The stock market is trying to tell us that the recession is almost over, but this economic downturn has turned into a depression for Dr. Duru. An old saying defines a recession as a time when your neighbor loses his/her job, and a depression occurs when lose YOUR job. After witnessing job loss amongst several friends and family, I have now joined the growing list of people who can proudly be counted as "lagging indicators" of economic malaise.

Eternal optimists are fond of dismissing unemployment numbers as a lagging indicator of the economy's condition, primarily because the stock market tends to bottom out before the unemployment rate reaches its peak. (Of course, these optimists never hesitate to cheer the first sign of improvement in the employment numbers.) These correlations look great AFTER the fact, but they are difficult to use for projecting stock market bottoms. The exact peak in unemployment is not announced in advance although projections abound. For example, in April, 2008, the Federal Reserve projected the unemployment rate would edge DOWN in 2009 and 2010. By October, 2008 this forecast changed to an edging UP and peaking of the rate in 2009. By the March, 2009 meeting, the forecast worsens still for a peak in unemployment in 2010, but no quick relief after the peak: "The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year." Under these conditions, companies will find revenues declining faster than their ability to keep shedding jobs to meet or beat earnings estimates.

The uncertainty in the timing of this unemployment peak contributes to multiple false bottoms as the stock market's imperfect pricing mechanism anticipates multiple false starts to an economic recovery. The current bear market has experienced four or five false bottoms (depending on how you want to count them) as the malaise continues to deepen beyond expectations. The same historical record used to support the lagging indicator thesis also seems to suggest that a March bottom in the stock market is inconsistent with a rising and sustained unemployment rate 12-18 months out. Bulls should feel free to adjust the unemployment forecasts as needed.

Despite my status as a stubborn bear, I will exercise my right to summon up some latent resevoirs of optimism and treat my status as a lagging indicator as a "unique moment of unprecedented opportunity." Assuming my ambition is not too large for my time (for example, I had to type much of this while balancing a sleeping baby in my lap!), you should expect to see more frequent postings, more practical analyses, and a business venture or two, including work in analytical modeling and price optimization.

Stay tuned, and, as always...

Be careful out there!

Full disclosure: No related positions. For other disclaimers click here.

DR. DURU®, 2009