Ignore the Noise
Economic data will continue to be uneven, but keep your eye on the improving trend.
It was another tough week for economic indicators with employment, initial jobless claims, and consumer confidence all posting clearly negative results. My old standby, the ISM (Institute of Supply Management) Purchasing Managers Index (PMI), continued to be in a growth mode but was less than expectations and not as bullish as the month before. Housing provided a bright spot with house pricing data from Case-Shiller and pending home sales knocking the cover off the ball on the upside.
The market reacted accordingly, and the Dow dropped 1.9% for the week. While the data was disappointing, I am still optimistic that the economy turned the corner beginning in June. I steadfastly believe that this recovery will fall somewhere between the normal growth rate after major recessions (6%-7% improvement over several quarters) and the current consensus for sluggish growth (2%-3%). Despite this week's setbacks, the magnitude of the past declines and the potential positives are consistent with growth of 3%-4%, though the data indicates that improvements could come a little slower than I had anticipated.
So is this run of bad news the start of a new trend, or just noise? This whole recovery has been characterized by mixed indicators that periodically give everyone a bad scare--and at least a small chance to get back in the market. As I look back over my weekly columns, it seems that about every fourth column, I spend some time explaining away one bad number or another. Just look at some of the headlines I have written: