Monday Morning: History less of a guide this time around

A few days after I wrote my last column, which argued that the market recovery still has some way to go, Ken Safian, a veteran analyst and asset manager, said, in effect: “Not so fast.” My arguments were based on research by Eric Bjorgen, a senior research associate at The Leuthold Group in Minneapolis.

Mr. Safian says so much is different this time around that all of Mr. Bjorgen’s history may not be much of a guide. In 1960, Mr. Safian, along with his late partner Ken Smilen, pioneered the concept of breaking the stock market into growth stocks and cyclical stocks.

As Mr. Safian acknowledges, each bull and bear market has different characteristics because economic and political conditions change and technological advancements occur to shake up the economy and the capital markets.

More outsourcing

But Mr. Safian, president of Safian Investment Research in White Plains, N.Y., argues that changes in the past several years are far greater than in past eras and are likely to make the current economic and market recovery unusual.

Among these changes is the growing outsourcing of even white-collar jobs overseas. Until the late 1990s, most of the jobs being exported were blue-collar jobs in such areas as textile manufacturing.

Now service-call centers, software programming and even computer-chip design jobs are being moved offshore to low-wage countries such as India. The transfer of higher-paying professional jobs offshore must have a long-term effect on the economy.

Another big change is the advent of terrorism that calls for increased security expenditures and measures to confront the problem.

That increased spending, at the very least, absorbs a good part of the peace dividend the country reaped after the end of the Cold War. Unfortunately, much of the peace dividend is already spoken for.

In addition, the long-term economic and investment effects of the psychological impact of living with the threat of terrorism aren’t known, and that uncertainty must be taken into account.

Mr. Safian also points to the lack of pent-up consumer demand as another difference. After most recessions, pent-up consumer demand fueled spending.

During the most recent recession and bear market, consumer spending continued strong. It was corporate spending that dried up.

Since there is no pent-up consumer demand and no sign of corporate spending picking up, the future direction of the recovery is uncertain.

The surge in productivity the country has experienced since the late 1990s is another factor that will affect the shape of the recovery, Mr. Safian says.

In part, that is a result of the huge corporate investments in technology in the late 1990s. That has contributed to slow employment recovery.

The breakthroughs in information technology also will have significant sociological effects, Mr. Safian says.

In fact, it is possible this technology may be contributing to the discrepancy between payroll employment as reported by employers and the level of employment reported by households. The employment situation as shown by the payroll figures looks far worse than is suggested by the reports from households.

Mr. Safian says this suggests many workers who are being cut from payrolls are starting their own companies that are providing technology-related services to their former employers. New technology makes this possible.

Also, the recent tax-law changes encourage former employees to start their own companies. If they register as corporations, they may be able to pay themselves dividends rather than salaries and pay only a 15% tax rate.

Others are working for startup companies whose payrolls take some time to be reflected in the payroll survey. Both of these developments are made possible by the recent technological changes.

These developments suggest not only that it is difficult to know how relevant the past performance of the stock market in recoveries is likely to be for investing this time, but also that it is necessary to constantly reevaluate the assumptions underlying financial planning practices.

Mike Clowes is the editorial director of InvestmentNews and sister publication Pensions & Investments