The following is from Kornitzer Capital Management's Third Quarter Newsletter.

       To help gauge the current state of the U.S. economy, we thought it would be helpful to do a little history lesson comparing the 2008-09 and 2001 recessions and their subsequent recoveries. We found there are both similarities and differences between the two periods. Both recessions were caused by the collapse of unsustainable bubbles: the tech bubble in 2001 and the real estate bubble of 2007-08. Both caused massive dislocations and widespread layoffs in various sectors of the economy. The most affected included the technology and telecom industries in the former and the financial and construction industries in the latter. Both led to huge declines in the stock market and a subsequent lowering of short term interest rates by the Federal Reserve. However, as will be seen in the data, the depth and breadth of the recession of 2008-09 was far greater than that of 2001.

      The length of time that companies were announcing large layoffs was about the same during both recessions, around 18-21 months. This was the most painful period of each recession. Average GDP was deeply negative in 2008-09 and the unemployment rate rose by over 5%. Additionally, the stock market fell sharply and the Federal Reserve lowered short-term interest rates by over 300 basis points (bp) in response. Not included in the table were the massive government stimulus programs, bailouts, and security purchases in response to the financial crisis and the recession. The financial crisis itself differentiated this recession from others. It was the first since the great depression that the general public feared losing vast sums not only in the stock market, but money they had deposited in banks and in the value of their home. Fear spread to all consumers, employed and unemployed.

      During the same job loss period in 2001-02, the pain in the economy was not as deep, but due to meteoric valuations the drop in the stock market was actually greater. Average GDP was positive during the period, but this masked a few quarters of actual contraction. However, the contraction was short and shallow because the breadth of sectors of the economy impacted was pretty narrow. If you did not own stocks or work in technology or telecom, then the impact on you as a worker and consumer was mostly headline news. The unemployment rate rose by 1.5%, far less than during 2008-09. After the short contraction, consumers went back to buying cars and homes pretty quickly. These purchases were helped as well by the Federal Reserve lowering interest rates by some 250bp.

      Despite average GDP growth of 3%, the U.S. went into job lull for some 14 months well after the 2001 recession ended. The unemployment rate fell only .1% during this next period as businesses in general got more productivity out of existing workers and manufacturers outsourced jobs to China. Much like today, newspaper headlines hailed this period a “jobless recovery.” Awaiting a turn in jobs the Fed remained accommodative keeping interest rates unchanged during this period. In October 2003, our newsletter was titled “Let the job growth begin.” Much like this letter we had analyzed previous recessions and concluded the job cycle was poised to turn positive. A good leading indicator was the stock market which rallied sharply, well before the trend in job growth turned consistently strong and positive. The S&P 500 rose over 40% during this period of inconsistent growth of payroll employment.

      After turning the corner on jobs, the economy and stock market entered a long period of steady growth. The economy created over 7 million jobs, GDP growth averaged 2.6% and the stock market rallied another 40%+ from early 2004 to mid 2007. Short-term interest rates rose over 3% from their lows as the Fed gradually tightened credit. Can the U.S. economy and stock market enter this kind of growth phase again? Can and will this economy create millions of new jobs in the coming years? We believe the answer is yes.

      The U.S. economy is currently 10 months into the “job lull” stage. Due to the depth and breadth of the recession of 2008-09, this period will likely persist for another 6-9 months. This time frame would be consistent with parallels to 2001. Business leaders acted swiftly and aggressively in trimming payrolls during this past recession. The good news is this led to an early, sharp recovery in corporate profits. However, in reaction to growing government regulation and potentially higher taxes, business leaders continue to rely on productivity growth rather than new hires to satisfy improving demand. They have shown a willingness to reinvest profits in equipment and software, but they have not yet gained the confidence to permanently take on new workers. We believe this will soon change. The good news is that future hiring plans will less likely be outsourced overseas. Wage rates are climbing throughout Asia and Mexico is increasingly being deemed unstable.

      Numerous data points lead us to believe the U.S. consumer is steadily climbing out of debt and will soon purchase autos and homes and other deferred items at a more normal rate. For example, TransUnion, a consumer credit data firm, recently reported that the average amount U.S. consumers owed on their credit cards in this year’s second quarter fell to the lowest level in over 8 years. Auto sales have been in the 9 to 11 million range for almost three years. These low levels were last seen 30 years ago when the U.S. labor force was 40 million lower! The same facts apply to home sales. New single family home sales have been in the 300-400k range since mid 2008. These levels also have not been seen for over 30 years and are some ¼ of prior peak sales. Given the size and coming maturity of the echo-boom generation (children of the baby boom generation), this level of new home sales is simply unsustainable. Echo boomers represent a very large group (nearly 80 million) that was born from 1976-94. They currently make up the bulk of all renters, but leading edge echo boomers are now in their early 30’s and are in their prime household formation stage. While high unemployment and heavy inventory of existing homes has been pushing out a demand surge for new construction, eventually it is going to come.

       The best indicator of better times to come is the stock market. After languishing all year the market finally appears to be coming to life. The Federal Reserve will never say they need or target higher stock prices, but we believe they do, particularly in times like these. Higher stock prices give business leaders confidence. Confidence leads them to expand and hire.

      As we discussed in our last newsletter, we believe stocks are poised to outperform bonds for an extended period of time. The differential between the trailing dividend yield on the S&P 500 and the yield on 10 year treasury bonds is at its lowest level since World War II. The Fed has indicated its intention to maintain low interest rate levels for the foreseeable future. Unless investors believe that dividends will no longer grow, money should begin moving toward stocks in a meaningful way. We believe dividends will continue to grow and thus expect stock prices to rise steadily going into 2011.