The millions of layoffs in the past year have been bad news for almost everyone—except, that is, for investors.
Companies turned smaller payrolls and other expense cuts into better-than-expected profits, fueling a 31% advance in the Standard & Poor's 500-stock index in the past year. "It's been a cost-cutting rally," says Terry Morris, senior equity manager at National Penn Investors Trust Co.
There are now more questions on Wall Street about the long-term impact of all this job-shedding. But, for a year, aggressive job cuts have improved investor perceptions of many stocks.
Starbucks (SBUX) has closed 900 stores and eliminated 19.3% of its employees, which according to Bloomberg data is one of the highest reported rates of layoffs among S&P 500 companies. The company scaled back U.S. growth plans that analysts and executives agreed had become too ambitious.
Such deep cuts seem to have paid off. Last quarter, Starbucks increased its earnings to 20¢ per share from 1¢ per share a year earlier. The company's shares are up 150% since the beginning of 2009.
And Starbucks did so without seriously hurting its corporate image or customer service, says Morningstar (MORN) analyst R.J. Hottovy. That's a common worry after job cuts in the retail and restaurant industry. But, he says, "based on improving store traffic trends, I really don't think that's the case here."
The S&P 500's big gains of the past year have taken place at the same time that U.S. nonfarm payrolls have tumbled by 5 million jobs, according to Labor Dept. data.
In that environment, former Starbucks baristas aren't the only job-seekers now watching their former employer appear to prosper without them. So perhaps it's a comfort that the boost from job cuts may be very short-lived.
Companies could make such deep cuts—and in many cases needed to do so—because of equally steep drops in revenue. At the request of Bloomberg BusinessWeek, market research firm IBISWorld compared estimated job losses in retail industries with those industries' sales losses in 2009.
There was a close correlation. U.S. supermarkets and grocery stores boosted employment 0.2% in 2009, as sales rose an estimated 0.2%. Hardware stores shed 3.6% of their workforce last year, IBISWorld estimates, while sales fell 3.6%.
The correlation between sales and job losses wasn't so perfect for most retail industries, of course. For example, recreational vehicle dealers saw sales drop an estimated 48.2%, but dealers could cut payrolls only 19.2%.
"A lot of these companies are right-sizing their businesses for a lower level of demand," says Channing Smith, a portfolio manager at Capital Advisors. Layoffs reflect executives' belief that the sales slump could persist, an implication that should concern investors. "You worry that demand is going to be slower coming back," he says.
Market participants and economists disagree on how fast the economy can recover in 2010. But most observers agree that, at least for now, the economy has stabilized. That may be good news for American workers.
When it comes to layoffs, "at some point you've got diminishing returns," Morris says. In 2010, he will be looking for companies to show sales growth, not just profit growth driven by reducing expenses.
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