Stocks are Rising but What about Economy?

Stocks have been floating higher as investors bask in a relatively healthy summer earnings season and slower summer markets produce a less tense view about the world. I guess the recent beach weather has mellowed investors.  Just like the recent shark sightings off Cape Cod, I feel a need to raise a flag of caution. A couple recent data points are warning us about potential treacherous times in the fall, likely October if the market keeps rising and history is any guide.

Slower growth for new factory orders in July, as reported by The Institute for Supply Management, suggest the recent health in the economy was due more to replenishing inventories than a more sustainable recovery. The index was 53.5, still in expansionary territory but declining from levels recorded earlier in the year. The August data point to be published at the beginning of September likely is the first data point investors focus on post summer vacations. Anything below 50 likely gets an immediate downward response in the equity markets, 50-55 likely produces a bit of fear going into October, and above 55 provides investors with some measure of relief.

The Federal Reserve is now apparently considering re-investing money back into the bond market once previously purchased mortgage and treasury bonds mature. These investments in the bond market over the past couple years were unusual and were originally an effort to stimulate the economy. The program has ended and thus a potential re-investment strategy is a change in outlook. Considering many investors consider the bond market somewhat over-priced (relatively low yields) this potential action seems to register a little higher on the desperation scale of monetary stimulus. As mentioned in an earlier post, I would not be surprised to see the Federal Reserve take more non-traditional actions as it attempts to stimulate the economy. Assuming the slowing new factory order data is foreshadowing a slower economy, I would expect the Federal Reserve's action to continue to move up the desperation scale. These efforts likely result in more volatility.

On a positive note, having spent the last few weeks outside of the U.S., I have been pleasantly surprised by the relative health of other countries. At this point I think investors should be focusing more on South American economies, Canada, and a few emerging markets in Europe and Asia. In addition, silver appears interesting at this level, if for no other reason than a more inexpensive way to diversify the portfolio without buying historically high gold prices.