Guzzo the Contrarian

As we all know, the unemployment rate just reached 9.8%. Yes, that level is disturbing, but it shouldn’t be unexpected since the President himself said a few months ago that the unemployment rate could reach 10%.

Although it’s not a surprise to those who keep up with such things, there have been news reports sensationalizing the fact that we’ve now reached unemployment levels not seen in 26 years! (their exclamation point).

So I decided to take a look at historic unemployment levels to see how they correspond with historic recessionary periods, and to see how our current situation compares with the unemployment situation of 26 years ago.

Courtesy of the FRED database and BLS data, the graph above compares both unemployment rates with periods of recession since the mid-1940’s.

As this graph shows, unemployment levels historically peak at or near the end of recessionary periods. Also according to this graph and BLS data, the recessionary period of 1981-82 marks the highest levels of unemployment since World War II. In November 1982, unemployment peaked at 10.8%, right at the end of that recession.

This graph also shows that since the late 1940’s, this current recession is the longest on record (24 months) and has also produced the steepest rise in unemployment (4.5% to 9.8%). I think everyone realizes it was a bad one.

But lets consider something else. As stated by Fed Chief Ben Bernanke, if the current recession has technically ended, then based upon the behaviors of these previous recessions it’s unlikely that unemployment levels will reach the 10.8% level reached in 1982, and should at worst rise slightly more, or start trending downward.

If what the Fed Chief says is correct, then we’re now looking at the beginning of a recovery period. So, I thought I would also take a look at the recovery period of 26 years ago. While not mentioned in those same sensationalized and fear-mongering news reports, the recovery period of 26 years ago produced excellent results. Unemployment quickly fell, GDP quickly rose, and corporate profits promptly turned around.

According to references provided at the early 1980’s recession wiki page:

Corporate earnings rose by 29% in the July-September quarter of 1983, compared with the same period in 1982. Some of the most dramatic improvements came in industries hardest hit by the recession, such as paper and forest products, rubber, airlines, and the auto industry.[42]

While that’s good news for the economy, what’s important to me is how the stock market also performed during that recovery period?

Lo and behold, it looks like stock market returns provided excellent results during that time period too. According to historic daily stock market data found on Yahoo! Finance, from a yearly low of 102.42 on August 12, 1982, the S&P 500 steadily rose to a yearly high of 172.65 on October 10, 1983, producing an almost 70% return over 14-month period.

So, what’s my point?

Don’t believe everything you’re being told. When reading sensationalized fear-mongering news reports likely created only to generate readership, keep in mind that there’s often more to the story than what’s being reported. As individual investors, it’s always in our best interests to be skeptical, investigate deeper, and then decide for ourselves.

Personally, I’m on the side of the glass being half-full instead of half-empty. Our economy is cyclical and so is my viewpoint. As I wrote at the beginning of the new year, I’ve changed my perspective from being overly-bearish into a more bullish perspective. While I don’t have any idea what will happen with the economy in the short-term, our economy is entering the recovery phase, and with time will eventually cycle into prosperity.

Related Links
The Recession in Perspective
Why It’s Not 1982 Again – Part 1
Why It’s Not 1982 Again – Part 2