The debate over whether the economy is slowing is dead. In fact, it’s appears to have been deceased for some time. Some of us may not have realized this essential fact, but the discussion of relevance has necessarily turned to the magnitude of the decline.
The latest batch of numbers confirm what the bond market has been predicting for some time: economic momentum is slowing, and more than a little. The accumulated numbers below tell the story. Of particular interest is the Philadelphia Fed index, which tracks manufacturing activity in New Jersey, Pennsylvania and Delaware. The latest report shows that the index went negative for the first time in three years, and by a surprisingly wide margin from the previous number. Meanwhile, the Conference Board’s leading index fell again by 0.2%, bringing the measure to its lowest since October 2005.
092206.GIFstill appears intact, equities are vulnerable to a larger correction going forward. Much, of course, depends on the economic reports coming next week, which will inform Wall Street as to just how much the economy is slowing.
Indeed, next week is stuffed with scheduled releases of new numbers that could take a toll on equities. Among the highlights:
* Existing Home Sales (Sep 25, 10 a.m.)
* Consumer Confidence (Sep 26, 10 a.m.)
* Durable Goods Orders (Sep 27, 8:30 a.m.)
* 2Q GDP, final (Sep 28, 8:30 a.m.)
* Personal Income & Spending (Sep 29, 8:30 a.m.)
The slowing U.S. economy, in fact, seems to have company. BCA Research on Wednesday, citing a survey of analyst expectations on the global economy, reports that a continued slowdown is widely forecast.
The good news is that when cycles turn, volatility in prices in asset classes tends to rise as the markets struggle to digest the shift in trend. Traditionally, such periods produce attractive buying opportunities for strategic-minded investors.
Indeed, such opportunities have been notably lacking this year. Virtually all of the asset classes have been priced for perfection as it relates to their particular slice of the world. But something less than perfection is starting to arrive, and the repricing of risk in more than a subtle manner may have started. For those with the cash at the ready, the future may extend deals that are too good to pass up. If so, that alone would mark a considerable change from the recent past.
Of course, an enlightened investor must realize that if the economy slows, but by a degree that still manages to surprise on the upside, stocks could rally and bonds could suffer. Everything is relative when it comes to the link between prices and expectations. That’s why the financial gods invented diversification. Nonetheless, redeploying capital across asset classes when expected returns rise, even on the margins, is the only game in town in the long run.


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