Markets & Finance

Market Anticipating a Better Economy


By Joseph Lisanti The economy continues to look feeble, but stocks are building strength. Over the 21 weeks that ended July 5, initial claims for unemployment held above 400,000 each week. During that same period, the S&P 500 gained almost 20%. Why the apparent disconnect?

As is often noted, unemployment is a lagging indicator, but to many Americans the latest episode looks worse than usual. In one respect it is. The median duration of unemployment for a worker is now up to 12.3 weeks, matching the record set in the 1981-82 recession. But in that recession, unemployment peaked at 10.8% vs. 6.4% last month.

"Fewer people are unemployed, but they are staying unemployed longer," says Standard & Poor's chief economist David Wyss.

Several factors are contributing to the longer-than-average length of unemployment, says Wyss, including the layoffs of a large number of older workers and managers, who usually need more time to find new employment. Also, the preponderance of two-income families allows some jobseekers the advantage of longer searches, but may restrict their ability to look for employment in other regions of the country.

In June, 56,000 manufacturing jobs were cut, bringing the total loss in that category to 2.34 million jobs since payrolls peaked in February, 2001. Much of this could be the result of structural changes in the U.S. economy as we increasingly move away from producing goods to providing services and selling products made in other countries. Laid-off factory workers need to be retrained before they can be hired for new jobs. That, too, can add to the length of unemployment.

We continue to believe that the monetary and fiscal stimulus already in place will boost the economy. Consumers should continue to spend, and corporations eventually will increase capital spending, if only to replace obsolete equipment. Ultimately, these factors should lead to job growth.

We advise keeping 65% of assets in equities in anticipation of a stronger economy. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook


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