Market Update

2013 March 17
by SJ Leeds

First, thank you to everyone who clicked over to  Here’s the link.  Jim and Kate were thankful for all of the interest and were especially grateful to everyone who made contributions to organizations that pursue research for childhood cancer.  Obviously, I’m also very appreciative of what you did.


Now, on to today’s blog.  Today, I want to hit two quick subjects: the employment participation rate and Howard Marks’ view about the future of equities.


The Employment Participation Rate

As most of you know, the unemployment rate would be significantly higher if the participation rate had not dropped.  The participation rate shows the number of working age adults who either have a job or are searching for a job.  If you’re not searching for a job, you don’t count as unemployed.


For the twenty years prior to the Great Recession, the participation rate had been above 66%.  Now, it’s below 64%.  If the participation rate were 66%, the unemployment rate would be 11.2%.


But, here’s what I found interesting.  One thing I had been hearing was that the participation rate was dropping because of demographics – baby boomers are starting to retire.  Well, that may be true, but if you look at the participation rate of people aged 55 or older, it tells another story (relatively steady to increasing over the past few years) (see chart below):


55 and over copy


You see drops in the participation rates of other groups, such as people with a high school degree (no college) and people with some college (but no degree).



Howard Marks

Howard Marks shared his views on the future of equities.  Here are some of his thoughts that I found most interesting:


1. The better that returns have been in the recent past, the less likely that they will be good in the future (all other things being equal).  (Simply put, you’ll have better returns buying stocks before the run-up, not after.)


2. When prices appreciate faster than cash flows grow, it’s safe to assume that some of the undervaluation has been reduced.


3. The 1990s had high returns due to economic growth, corporate performance, technological and productivity gains, declining interest rates, low inflation and relative peace in the world.  We also benefited from a naïve view of the debt-fueled expansion, the profit potential of e-commerce companies and the extent to which equity gains could be perpetuated.


4. After stocks run up, expectations of future returns increase.  This is opposite of what our expectations should be.


5. Earnings yields (the inverse of the P/E ratio) are high relative to interest rates.  While that’s a positive for stocks, it also reflects interest rates that are artificially low.  When rates go higher, stocks will be less attractive.


6. Future growth will be slower due to challenges in restarting growth and the dire prognosis for the federal deficit.


7. Profit margins are unusually high right now.  If they return to historic levels, stocks would seem more expensive.


8. Corporate cash is high – implying safety, potential for stock buybacks and possible dividend increases.


9. Investors still aren’t enamored with stocks – although they’ve had a very good run.  Many institutions are under-allocated to stocks – there is still relative disinterest.  This is a positive for stocks.


10. If we have another good year or two, sentiment on stocks would turn (and become positive)!  At that point, we’d switch from the fear of losing money to the fear of missing opportunity.


11. There are three stages of a bull market:


A. the first, when a few forward-looking people being to believe things will get better


B. the second, when most investors realize improvement is actually underway


C. the third, when everyone’s sure things will get better forever.


12. Howard Marks thinks we’re somewhere in the first half of stage two.


13. If he’s wrong, it’s not like you’ll be sorry that you didn’t pile into Treasuries (with their low yields).


Have a great week.

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