The new non-manufacturing ISM survey was released a bit earlier than expected today, indicating that services activities were at their lowest levels since the datapoint was first released. I really don’t think this is new news. We know that the economy is slowing. The market, however, hasn’t responded very nicely to the release this morning. Why might this be? Well, last week the S&P 500 actually had its largest weekly gain in five years, and some are suggesting it was the first of perhaps many bear market rallies. As we’ve stated before, Fed rate cuts won’t solve the economy’s problems overnight, but they will influence psychology at the margin and certainly help individuals shore up their balance sheets and cash flow through the lower interest rate mechanism.
The earnings reports for most of our companies continues to be quite good. This doesn’t mean that stock prices have responded in a positive fashion, but we think that they ultimately will. Once the dust settles down from the earnings season, we suspect that investors will take a second look at where the growth is in the economy and buy many of these names, which have in many cases been beaten down as much as 20-25% from their highs. Barring a complete disaster, investors will return to growth stocks. That’s our story and we’re sticking with it. Call us if you’d like to get started.
Of additional interest to investors over the next couple of days will be tonight’s Super Tuesday results and Cisco’s earnings report tomorrow evening. As is usually the case, John Chambers can often set the tone for the performance of the entire technology sector during these calls. As we’ve said in previous updates, Chambers has a pretty good pulse on the economy and while not an economist, is someone worth paying attention to.
With respect to the election, our biggest concern for 2009 is political in nature. Historically, elections haven’t meant much for the markets, but with the economy slowing, the possibility of a Democratic Presidency and Congress, and all the banter about raising taxes, the issue does have us a bit concerned. All of us who are exposed to the markets or are gainfully employed better hope that tax rates aren’t raised and that the Bush tax cuts are made permanent. I can think of no greater damage to the economy than raising taxes into a weakening environment. Doing so would completely neutralize or override the current monetary and fiscal stimulus being applied. And unless the Clinton’s want to destroy small business formation and see the non-manufacturing ISM survey plunge even more, they should rethink their policy of making health care coverage mandatory. I really wish they’d be pro choice about far more sensible matters. Frankly, it’s just weird.
