Some Perspective On Largest Payrolls Drop Since 1974

The headlines in the media today and all weekend will highlight the huge drop in jobs. November nonfarm payrolls fell be 533,000 (vs. 335k consensus), the largest drop since December of 1974. The unemployment rate rose to 6.7% (vs. 6.8% consensus).

I have a lot to say about this, but I will try to be succinct. First off, if this figure had hit the wires a couple of months ago, the Dow would be down by 500 points. This morning, it fell by roughly 150 points after the open. This tells me that a negative figure was pretty widely expected, as well it should be. We should expect more bleak economic data to hit the wires in the near future as well.

Second, employment is a lagging indicator, not a leading one (stocks are a leading indicator). Unemployment will peak well after the economy has bottomed. So the worst thing an investor can do is say that he or she is going to wait until the economy bottoms and the jobs numbers improve before they decide to invest. By then, stocks will likely be 25% higher, at least.

Third, the media will harp on the 1974 figure, and say how amazing it is that job cuts haven't been this severe in 35 years. But let's go back and look at 1974. That's right, my friend sent me this chart that shows how the S&P 500 fared around that time.

You'll notice a couple of things. One is that the market had experienced a dramatic plunge from its highs going into Q4 of that year. But by the time those payroll figures came out in December of that year, the market had already seen its lows. I'm sure most people didn't believe it back then either. But by 1975, the market began to move sharply higher.

Who knows if the analog will play out similarly this time around, but it is worth paying attention to. I never want to sound pollyannish, and I have advised keeping your powder dry, but I don't want to be blind to the potential for a big rally in 2009.