No Longer a “Jobless Recovery”

The U.S. economy forges on, adding jobs and improving standards of living.  It was reported today that the unemployment rate fell from 5.4% in December to 5.2% in January, a three-year low.  According to Bloomberg News, the latest revisions show that the level of now exceeds those of February 2001, a month before the world’s largest economy fell into an eight month recession. 

Latest government revisions, made possible through time and more complete data rescue President Bush from becoming the first president since Herbert Hoover to loose jobs during a term in office.  Bloomberg notes that this job report marks the end of the longest employment slump since the Great Depression, when it took a decade to recover jobs lost by the declining economy.

Mr. Bush and Mr. Greenspan are to be congratulated for the strong measures they took to bring this economy through the significant shocks of a stock market crash, the terror attacks of September 11th, wars in Afghanistan and Iraq, and corporate scandals on an unprecedented scale.  The benefits of lower taxes and interest rates quickly imposed will take more time to completely analyze, but today’s strong positive results add credence to the policies of both men.

Problems remain, but compared to what this economy has endured in the past four years, it’s difficult to be pessimistic about our future.  Uncertainty remains about oil prices, but recent information suggests they will be coming down.  Last week, OPEC voted to sustain current production levels.  Improving stability in the major production areas such as Venezuela, Russia, North Sea, and the Middle East have also brought crude prices down.  Prices have fallen more than 12% from their October highs.

Businesses are hiring as indicated by the rising jobs numbers.  While worries persist over such issues as rising labor costs (insurance, regulations and legal costs), the potential for declines in consumer spending, rising raw material costs, and increasing competition, these are everyday issues for any business.

Recent weeks’ action in long-term Treasuries indicates that bond investors believe inflation is no longer a concern – more importantly, they believe the Fed will increasingly believe the same thing, reducing the need to raise rates much further.

Finally, it may be fair to say that the resolve of this president and his proven ability to enact legislation he deems important, will bring improvement in the business climate in the coming two years.  It’s clear that he aims to avoid allowing his second term to be as ineffective as those of many previousU.S.presidents.

January’s stock market was a tough one, but this week brought a welcome improvement in sentiment.  The declines of last month were likely due to the bleeding off of some overly optimistic expectations in December.  In January, the Dow was down 2.6% while the NASDAQ declined 5.2%.  The best performing sectors were energy (despite crude prices falling), natural resources, and utilities.  The best performing global regions and countries were South Korea, Latin America, Australia, Mexico, and the Pacific Rim.

Equity valuations worldwide appear reasonable, especially when considered in the context of low interest rates that are likely to remain low.  The Dow Jones Industrial Index is currently trading at a P/E of 15.9 times estimated forward earnings.  The NASDAQ composite, which contains the majority ofAmerica’s technology and biotechnology stocks, appears on the high side at 32 times earnings, but it has been MUCH higher in the past.   Given that many of the companies in the average are growing at rates that exceed 32%, the level is not so unreasonable.

A quick glance at the table of the world’s major markets below illustrates that index p/e’s are generally in the mid to high teens.  While not at bargain basement levels like those seen in the early 80’s, values are compelling enough to make the case that stocks will generate better returns than alternative investments in the years ahead.



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