This note looks at company profits and dividends during past recessions and what that might tell us about long term trend levels for earnings and what earnings and dividends may do through the current recession. The key points are as follows:

– While company earnings likely have more downside ahead of them, the trend level of earnings still implies that shares at current levels are cheap.

– Dividends are also likely to fall further but dividend yields are attractive relative to cash and bond yields and are at levels associated with above average long term returns from share.

– Of course this provides no guide as to whether shares have bottomed or not, but it is consistent with shares being attractive from a long term perspective.

– Domestically, the latest labour force data for February present a confusing but nevertheless weak picture of the labour market. While total employment rose by 1,800 jobs in February full time jobs are continuing to slide and are now down by 102,000 since July, the switch to part-time employment is consistent with rising caution on the part of employers and the continuing trend rise in the unemployment rate to now 5.2% is consistent with a weakening labour market. Roughly 25,000 full time equivalent jobs were lost last month and the rise in the unemployment rate is telling us that new jobs (whether part time or full time) are not being created fast enough to absorb new entrants to the labour market. The continuing slide in job vacancies and in employment hiring plans as revealed in various business surveys point to a sharp fall in employment going forward. We remain of the view that unemployment will rise to 7% by year end and to 9% next year. The deteriorating labour market along with the continuing deterioration in the global economic outlook is consistent with the RBA cutting interest rates again next month by 0.5% and taking them to below 2% by year end.

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