Market Update
Dwight Johnston
Vice President, Economic & Market Research
"Not Bad" Isn't Good Enough
The stock market rebound from the twelve-year lows recorded on March 9 has been sharp and quick. The rebound began with a "leaked" memo from Citibank that the first two months of earnings were "not bad." From there more banks reported "not bad" earnings for January-February, Wall Street deemed Geithner's latest plan to save the banks as "not bad," and FASB's ruling on mark-to-market accounting methods means that bank writedowns in the first quarter will be "not bad."
The "not bad" news continued with auto sales. GM's sales declined by 45 percent, Ford dropped 41 percent in sales, and Chrysler and Toyota each declined by 39 percent. This sounds horrific, but expectations were for even bigger declines. Equity analysts and the automakers themselves touted the numbers as "not bad."
The latest "not bad" news was the jobs report. Nonfarm Payrolls declined by 663,000 and the Unemployment rate surged from 8.1 percent to 8.5 percent. The reaction from Wall Street is "not bad." I'll give Wall Street a pass on the "not bad" game for some of the news, but I draw the line with jobs. This is bad. The U.S. has lost more than two million jobs in the first three months of 2009, 3.7 million jobs in the last six months, and payrolls have decline by more than five million jobs since the recession began in January 2008. Further, the forward looking indicators of Weekly Jobless Claims, Hours Worked, and Temporary Hiring have all deteriorated during the past month. I still have hopes the worst for jobs will be in the first half of 2009, but there is absolutely nothing to suggest this yet. This is unadulterated bad news.
Wall Street pundits have successfully lowered the bar on economic expectations and earnings expectations. By performing this magical feat on the psychology of the market, we get these positive reactions to "not bad" news. For a period of two or three months, traders and investors can ignore reality and focus on how "not bad" news will become good news down the road. I truly hope this is correct, but I can't believe the economy can bottom and start the long, painful road to recovery until we see some signs of "good news" in the payroll data.
If you look back at the miserable news we've had on the economy during the first quarter of 2009 and the deteriorating loan performance measures on consumer and business debt, you must realize this damage was caused by last year's job losses and business closings. It takes a while for most of the newly unemployed to stop paying bills or for failing businesses to shut down. Consumer-related economic reports have yet to see the full effect of the job cuts this year. I'm anxious to report some actual "not bad" news, but this must start with jobs. There are some, but I doubt if there are many people on the unemployment rolls who open their unemployment checks and say "not bad."
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