Today the government revised its estimate of second quarter Gross Domestic Product to a weak 1.6%, down from the original estimate of 2.4%. Equity markets cheered this news, with the S&P 500 gaining 1.7%, while Treasury yields rose substantially. Although the downward revision confirms the economy slowed considerably after April, investors evidently were relieved that the numbers were not worse. However, we can find no great comfort as the risk of even slower growth, if not outright recession, continues to rise.

Clearly, the extraordinary fiscal and monetary stimulus enacted over the past 18 months has failed to generate strong, sustainable growth. Consider the plethora of negative news over the past few weeks:

  • Real GDP growth has downshifted from 5% in the fourth quarter of last year, to 3.7% in the first quarter of this year, 1.6% in the second, and potentially below 1% in the third.
  • Existing home sales plunged 27% in July as government incentives to purchase homes expired. At the current pace of sales, homes on the market are taking a year to sell.
  • New home sales declined 12.4% to a paltry 276,000 annualized rate. Perhaps new home sales are approaching a bottom, but with high inventories and many more foreclosures to come, the housing market is likely to struggle for a long time.
  • Durable goods orders declined 0.3% in July against expectations for a 3% rise. Importantly, measures of corporate capital spending have recently disappointed.
  • Weekly new claims for unemployment insurance have averaged over 480,000 over the past month, indicating that employment is on the verge of worsening.
  • Intel warned that PC demand has weakened and the company lowered its earnings guidance for the third quarter. This follows similar cautious comments from other large companies such as Cisco Systems and IBM.

As for stocks, 1040 on the S&P 500 is a very strong support area. Following today’s negative news, the market touched and then rose strongly from this support level. However, we continue to recommend a defensive portfolio as the evidence suggests high risk of a renewed recession.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.