Double Dip? We don’t see it―Yet.

By David B. Armstrong, CFA | Aug 08, 2011 | Weekly Market Commentary

We acknowledge that there are signs that economic growth may be slowing in the months ahead.  One indicator we watch here at Monument Wealth Management is the Institute for Supply Management’s (ISM) Manufacturing (PMI), and Non-Manufacturing (NMI) reports on business.  When they read 50 or higher, it signals that there is growth in business activity.  The PMI measures the manufacturing portion of the economy and the NMI measure the services sector of the economy.

We also watch the yield curve, because every recession since 1962 has been preceded by an inversion of the yield curve (measured by the three-month and the ten-year US Treasury yields).

Guess what!?…

Unless you live under a rock, you know all of the equity markets we track were losers last week – big time.  The Dow Jones Industrial Average (DJIA) lost -5.75% to finish at 11,444, the S&P 500 Index lost -7.19% to finish at 1,199 and the Nasdaq Composite Index lost -8.13% to finish at 2,532. The Russell 2000 Index, which tracks the performance of small capitalization stocks, lost a whopping -10.34% to finish at 715.

The PMI and NMI are both still above 50 (albeit they have signified less/slowing growth).  Think of the ISM measures like the speed of a car, except 50 is the point that you switch from forward to reverse.  The PMI (manufacturing sector indicator) recently dropped from 55.3 to 50.9.  Slowing, not reversing.  The NMI (the services sector indicator) dropped from 53.3 to 52.7 – a 0.6 percentage point drop.  Remember, the services sector accounts for a massive amount of our economy.  Again, slowing but not reversing.

Now, about the yield curve.  It’s historically been a very reliable indicator of any looming recession.  Here’s the quick and dirty – it’s historically steep (being steep is the opposite of being inverted), has not inverted since Aug 2007, and if we entered a recession under these conditions it would be the first time in 50 years.

I’m not saying that a double dip recession can’t happen, I’m just saying that the signs that are good predictors of it are not signaling it yet.  Possible, sure. Probable, ehhh, I just don’t see it yet. But you know the old saying – “this time could be different.”  How many times have I heard that one before?

In a nutshell – economy slowing, yes.  I acknowledge that there is not much on the horizon to give us hope that GDP will reach a point that the US starts to really expand and create a lot of new jobs.  However, an economic recession is not likely under current conditions.

As for the S&P downgrade – I have this to say: The US was downgraded from AAA to AA+.  The European Central Bank (ECB) was not downgraded.  Perhaps S&P missed the news on Italy and Greece – I mean, I know that the new season of MTV’s “The Jersey Shore” just started, so it’s possible.

France is AAA.

Italy is AA rated.

Hummm…I’m just pointing that out.

Call us for help or if you have any questions.

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Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

 

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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