Where is the recovery in jobs?
In the 10 recessions between World War II and 2001, the jobs
lost during the recession were fully recovered within 4 years of the previous peak
in employment, according to the blog, Calculated Risk. In fact, with the
exception of the 2001 recession, the previous 9 recessions had recovered all
their lost jobs within a relatively short 2½ years.
The 2007 recession, however, is a different story.
At its nadir in February 2010, the U.S. economy had shed
nearly 9 million jobs from its prior peak, according to the Bureau of Labor
Statistics (BLS). As of last week’s June employment report, the U.S. economy
had recovered less than half of those lost jobs – and we’re more than 4 years removed from the peak employment level of
late 2007, according to the BLS.
Why has the jobs recovery from this recession been so
painfully slow? Here are several reasons:
(1)
Recoveries from recessions caused by
financial crises – like this one – are notoriously slow.
(2)
Extremely high economic policy
uncertainty emanating from Washington made corporations cautious in hiring.
(3)
The extension of unemployment
benefits to 99 weeks reduced some people’s desire to find new work.
(4)
Uncertainty from events related to
the euro crisis dampened business demand and the need for more workers.
Sources: Gary Becker, Nobel Prize
Winner and Richard Posner blog; The Wall
Street Journal
There is some good news, though, that could eventually provide
a spark for new hiring.
Corporate profits as a percentage of gross domestic product
(the value of all goods and services produced in the U.S.) recently hit an
all-time high, according to Business Insider. This means corporate profits are
at record levels. On top of that, corporate cash levels have reached historic
highs which suggest corporations have plenty of money to reinvest for growth,
according to Yahoo! Finance. With corporate profits and balance sheets looking
solid, all we have to do is get these companies to start spending some of that
cash on new hires. If that happens on a large scale, it could be a huge boost
to the economy and the financial markets.
INVESTORS HAVE GROWN VERY
FICKLE in recent years as measured by how
long they hold on to a stock. There was a time when investors were really
investors and bought a stock for the long run. In fact, between 1940 and 1975,
the average length of time a New York Stock Exchange stock was held before it
was sold was almost 7 years, according to data from the New York Stock Exchange
as reported by a September 2010 Top Foreign Stocks blog post. By 1987, it had
dropped to less than 2 years. And, in the highly volatile year of 2008, the
average holding period was less than 9 months, according to The New York Stock
Exchange.
So, does this fast trading result in better returns?
A highly quoted study by Brad Barber and Terrance Odean of University
of California-Davis published in April 2000 analyzed the results of nearly 2
million trades from a discount brokerage firm between 1991 and 1996. The study
concluded that the 20 percent of investors who traded the most frequently underperformed the 20 percent of
investors who traded the least frequently by a whopping 7.1 percentage points
on an annualized basis after expenses.
The main conclusion of the study was, “Trading is hazardous
to your wealth.”
One very interesting tidbit from the study was the gross
returns between the frequent and infrequent traders were basically the same. In
other words, stock selection was not a problem for the fast traders; rather, it
was the expenses of the frequent trading that caused their net returns to lag
far behind the infrequent traders.
From a practical standpoint, selling a stock is necessary
from time to time. The study simply drives home the point that keeping trading
costs as low as possible is critical to having net returns come close to gross
returns.
Weekly Focus – Think About It…
“Learn every day, but especially from the experiences of
others. It's cheaper!”
--John Bogle, founder of The Vanguard Group
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