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The Growth Recession

Posted on February 19, 2013

“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” – President Harry S. Truman

recession2.jpgLast week we expounded on one of the topics from our recent investment forum entitled The Certainty of Uncertainty. This week we are going to stay in that same vein and dig a little deeper into one of the main sources of market uncertainty which we refer to as The Growth Recession.

The bottom of the financial crisis, as measured by the US stock market, occurred almost four years ago on March 9, 2009. The National Bureau of Economic Research (NBER) puts the bottom of the economic recession at June of 2009. Although the stock market and the economy bottomed around the same time, the speed of the recovery in these two markets has been quite different. One of the hardest things for our clients and many other investors to understand is how the stock market has rebounded so well off of its low when the economy, as measured by GDP growth and employment, is still nowhere near the level it was at before the crisis. The apparent contradiction leads many investors to inherently distrust the stock market. Headlines talking about how the recovery has benefited Wall Street (stock market) but not Main Street (jobs) simply reinforce this distrust.

The complaint that our current recovery doesn’t feel like a “recovery” is well founded. The chart below shows just how weak the current recovery has been versus past recoveries as measured by GDP growth since the trough of the recession.

2013-02-19_Weakest_Post_War_Recovery.png

Not only is the current recovery well below the average, but it is actually the worst recovery in post-World War II history up until this point in time. To make matters worse, the tepid growth we have seen in GDP has not been passed on to the labor force. The second chart plots real GDP along with real median household income here in the US over the past three decades. We can see that GDP bottomed sometime in 2009, but real incomes have continued to drop off precipitously since the economy peaked in 2007.

2013-02-19_Growth_Not_Hitting_Bottom_Line.png

So why hasn’t the growth in GDP translated into more jobs and higher incomes for American workers? One of the answers is an increase in corporate productivity. Corporations are doing more with less, which has led to amazing levels of profitability in light of tepid revenue growth. This last chart shows how much earnings have grown since the bottom of the stock market versus revenues. 

2013-02-19_Productivity_Gains.png

Corporations have been reluctant to hire new workers because they have been able to increase earnings by simply cutting costs and boosting productivity. In a recent blog post, fellow investment manager Cullen Roche summarized this phenomenon beautifully.

It’s a strange sort of environment we’re in because consumers are just strong enough to keep spending at a modest level, but not strong enough to spend at a rate that causes very high inflation.  And this puts corporations in the driver’s seat.  They can maintain a steady revenue flow and manage their largest expenses (their employees) at a rate that isn’t overly onerous on margins.  In other words, the capitalists are beating the labor class.

Like it or not, the current economic climate has been the perfect setting for record corporate profitability, which has translated into higher stock prices. Tepid GDP growth, in and of itself, is not a reason to “distrust” the stock market. That being said, elevated profit margins are also not a reason to throw caution to the wind and assume that the next four years of stock market returns will look just like the last four. Taking a closer look at the last chart, we can see that neither revenues nor earnings have grown much, if at all, since the middle of 2011. Gains in stock prices since that point have almost entirely been driven by multiple expansion (e.g. investors assigning a higher value to a corporations underlying earnings stream), which we wrote about last November in Valuation Matters and Can the Stock Market Repeat?.

This trend of stock prices moving up without improvement in earnings or revenues, one of the reasons we were too cautious in our positioning last summer, cannot continue on forever. Since the resolution of the debt ceiling, volatility has dropped off, stock prices have gone straight up, and investor sentiment has turned much more bullish. Whenever we see those three things happen in tandem, caution is typically warranted. That being said, there are signs of improvement in the economy, which could very well lead to growth in earnings, revenues and maybe even jobs. Uncertainty is always part of investing, which is why we rely on our proprietary risk management model MarketVANE to help us try to decipher the true signal threw all the noise.


elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.


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Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.

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