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Investing Specialists

Economy Limps Along the Sideline of D.C. Showdown

With everyone focused on Washington, there seems to be little concern about the fundamental strength of the economy.

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Again markets spent most of the week reacting to news out of Washington, and not much time on fundamentals. It looks like the market continues to believe that Congress will come to a relatively quick resolution of both the shutdown and debt ceiling issues. And after that, it looks like everyone is anticipating a big jump in economic activity and corporate earnings. The huge rally on Thursday, when there were early hints of a settlement, shows how much everyone is afraid of missing the next move up. There seems to be little concern about the strength of the economy. That is a big mistake, in my opinion.

Last week's key markers, including auto sales, pending home sales, and the ISM services data, all showed signs of a plateauing or even slowing economy, even before the government shutdown began. This week's data wasn't much better, with soft weekly retail sales, a somewhat suspect jump in initial unemployment claims, and a reduction in worldwide growth forecasts from the International Monetary Fund. I don't put much weight on either, but consumer sentiment and small-business confidence were also both down in this week's reports, although perhaps less than I might have guessed.

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