Over the past month there has been a tug of war between weakening economic data and improving stock market indicators. Data points like declining industrial production and continued negative readings in the Conference Board’s Leading Economic Indicators continue to suggest an economic slowdown ahead. Meanwhile, global stock markets have rallied sharply over the past few weeks. More importantly, indicators of underlying market strength have begun to improve significantly. In fact, many of the companies that one would expect to be most negatively impacted by a weakening economy have instead performed the best in recent months. This could be the market’s way of signaling that the widely-anticipated economic slowdown will not materialize as expected.
It is still not clear which side will win out. We must remain open minded to a wide variety of outcomes. However, our process demands that we listen to the message of the market and follow the weight of the evidence. Given the recent improvement in market health, we are looking to buy select stocks/add stock market exposure for most clients on any near-term weakness. Nevertheless, our process suggests it is still correct to keep some extra cash for buying opportunities should a larger pullback materialize in the months ahead.
We are writing this before the Federal Reserve meeting and their accompanying commentary. Additionally, we are in the middle of earnings season with several of the largest companies in the market scheduled to report earnings this week. The outcomes of these events, as well as the market’s reaction to them, will be important to monitor.
