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Investing Specialists

Data Points Not as Bad as Market Suggests

Never forget the shock value of a negative data point in a panicky market.

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The market sunk again this week due to new worries about Europe and a string of terrible economic news on Thursday. The European situation was compounded by the fact that European GDP growth crawled to a virtual standstill during the second quarter, much as it may have in the United States. These slower growth rates will make it even more difficult for Europe to deal with its intractable debt crisis.

Outside the strong industrial production number on Tuesday, the economic data points released were amazingly consistent and crummy, at least on the surface. Peeling back the layers of the reports, the data points were still bad, but not nearly as bad as bad this week's market action would suggest. This week's news stood in stark contrast to last week's data points, including better initial unemployment claims and retail sales that showed an improving trend (this Tuesday's weekly retail data continued to show decent growth in face of crumbing financial markets). Poor regional purchasing reports, falling existing home sales, and a jump in consumer prices all overwhelmed the market on Thursday.

Despite this week's data, I suspect that the economy won't move into another recession (without some help from our politician friends). Auto production continues to rebound, gas prices are falling again, and  Boeing (BA) just might make the second half look a little better as new jetliners finally roll off the production line. My biggest fears are that we will talk ourselves into another recession and falling stock markets will affect consumer spending at the high end, heretofore an area of strength. (However, the evidence that falling stock markets crater consumer spending is pretty thin; effects on spending were minimal after the Nasdaq collapse in 2000/2001 and the one-day 25% crash in 1987. But the profile of consumer spending has shifted to the high-end spender during the ensuing years, potentially amplifying the effects of a falling stock market.)

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