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Investing Specialists

Market Runs Hot and Cold with Economic Indicators

Things looked up this week on the data front, but there will still be bumps on the road ahead.

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This week's economic indicators provided welcome improvements over the prior two weeks' worth of data, which were modestly disappointing. While the numbers this week were uniformly positive, I caution investors not to over-react to one week's worth of highly jittery indicators, even if they do bolster my optimistic view of the economy. Next week could bring more numbers that might not look as good, including the government's pesky retail sales report.

As investors, we need to get over our manic-depressive relationships to economic indicators. In the two weeks prior to this latest week, markets lost almost 4% as the indicators turned in a decidedly mixed performance. This week, positive data points managed to turn the markets around with the S&P gaining 4.5%. My hope is that a flow of positive third-quarter earnings reports over the next month will take away some of the market's microscopic focus on the economic indicators, at least temporarily.

Good GDP Growth and Productivity Should Drive Positive Earnings Surprises
Given the better GDP numbers (I predict around 3.5% growth in the September quarter), I am expecting revenues could look a little better than last quarter. At the same time, employment (the key cost driver in most businesses), continued its downward trend in the third quarter. In aggregate, it seems likely that margins will get better as revenues increase and costs fall (see After the Productivity Spike, Expect More 3Q Pleasant Surprises).

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.