Is This the Next Incredible Buying Opportunity?

Do you know the five best years to have bought stocks in the past four decades? They were 1974, 1982, 1987, 1990, and 2002.

Had you the foresight to buy stakes in high-quality companies such as Berkshire Hathaway (NYSE:  BRK-B), Johnson & Johnson (NYSE: JNJ), or even Valspar (NYSE:  VAL) at some of those major market bottoms, you could be sitting on a small fortune today. Warren Buffett laid the groundwork for his stunning performance in 1973, buying Washington Post shares for $11.38 each; those shares now trade for about $345.

It turns out that there's a common thread among four of the years (all but 1987). Although no indicator can consistently predict the market's performance, this particular trait has coincided with four of the five best investing opportunities in the past 40 years.

Even better, this indicator suggests that we may be in one of those rare periods right now. But before I show you the data proving that point, let me explain what this indicator is.

How to profit from payrolls 
The number is the Bureau of Labor Statistics' measurement of U.S. employment. It's the most basic statistic out there -- an estimation of all of the nonfarm salaried jobs in America. Like any statistic, it has limitations, one of which is that it does not count the self-employed. But it is an excellent measure of the health of the economy.

Given normal population and economic growth, there is upward pressure on U.S. employment numbers on the order of 1% to 3% per year. The time to perk up as an investor is when employment numbers shrink year over year, and, specifically, when they shrink at lower rates than they did the prior month.

This is because each of the best buying opportunities -- 1974, 1982, 1990, and 2002 -- were in the thick of large and protracted declines in employment. Unemployment soared and our economy suffered through painful contractions. When that happens, the stock market generally contracts as well. But buying in the eye of the storm has proven very lucrative over the long run, as this table shows:

Period	Length	Maximum Decline	S&P 500 Five-Year Return From Bottom
1974-1975	12 months	(2.7%)	66%
1981-1983	18 months	(2.7%)	225%
1991-1992	15 months	(1.5%)	96%
2001-2003	29 months	(1.6%)	101%
2008-2009	12 months (so far)	(4.3 %) (so far)	???

Source: Bureau of Labor Statistics.

A weak June
After a surprising May when the country lost only 322,000 jobs, June data came in with a loss of 467,000 jobs, which importantly took the year-over-year change down to negative 4.3%, a serious contraction by any measure. In fact, this was the largest contraction since 1949, 60 years ago[a1] . The following chart shows just how quick and severe this recession has been:

	Nonfarm Employment (in thousands)	Percent Change Vs. Prior Year
January 2008	138,002	0.7%
February 2008	137,919	0.6%
March 2008	137,814	0.4%
April 2008	137,764	0.3%
May 2008	137,717	0.1%
June 2008	137,617	0%
July 2008	137,550	(0.1%)
August 2008	137,423	(0.2%)
September 2008	137,020	(0.6%)
October 2008	136,597	(1%)
November 2008	136,013	(1.5%)
December 2008	135,489	(1.9%)
January 2009	134,333	(2.7%)
February 2009	133,652	(3.1%)
March 2009	133,000	(3.5%)
April 2009	132,481	(3.8%)
May 2009	132,159	(4%)
June 2009	131,692	(4.3%)

Source: Bureau of Labor Statistics.

And herein lies the opportunity. Clearly, this is a deep recession. After all, we've already experienced a 4% year-over-year drop in employment, and we're only a year into it. While the stock market could go down further, perhaps not everyone is aware that, like past contractions, this could be one of the greatest buying opportunities in years.

If the economy does rebound quickly, we may look back on Fifth Third Bancorp (Nasdaq:  FITB) and PNC Financial Services (NYSE:  PNC) as wonderful buys. But if we aren't out of the woods yet, I'll take my chances with blue chips like Kimberly-Clark (NYSE:  KMB) and Abbott Laboratories (NYSE: ABT).