Changing Direction?

Is the economy giving us a head-fake?

Back in the Cretaceous Era, I played a little football. And one of the first moves I learned was a ball-carrier’s head fake. When approaching a defender, a ball-carrier will look and lean in one direction, then change at the last minute. If the defender has been watching the carrier’s head, he’ll be deceived and miss his tackle.

For in 2010 and 2011, the economy gave investors a head-fake. Initial strength in employment and production faded over the summer, and by early fall recession fears were rampant. But then those fears failed to materialized, the economy continued to grow, and the market rallied into year-end, confounding the bears who had been convinced that the economy was about to roll over.

Are we experiencing another head-fake now? Certainly there has been a raft of weak data lately—employment growth has been anemic, retail sales declined for three months in a row, and consumer sentiment remains weak. But the way to guard against a head-fake is to watch the runner’s hips, not his head. The way to avoid a head-fake in the economy is to watch what consumers are doing, not what they’re saying.

And consumers are still spending. Yes, retail sales are lower, but a lot of that can be explained by lower gasoline prices and a hot summer that sends people to the beach rather than the malls. But home prices are actually going up for the first time in years; the portion of homes undergoing distressed sales is falling across the country; consumer credit is rising; and auto sales have been unexpectedly strong, in spite of a lackluster model year.

It’s easy to be swayed by the doom-and-gloom talking heads, and forget that the economy is still growing, albeit slowly. Investors need to beware of the head-fake, invest with their heads, and watch the economy’s heart.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Leave a Reply

Your email address will not be published. Required fields are marked *