In the U.S. this week the ISM manufacturing numbers show further weakening in manufacturing. The ISM Manufacturing Index falling 3.8 points to 49.7. Anything blow 50 is a concern! More troubling was the fact that new orders plunged 12.3 points to 47.8. This was the biggest drop since October 2001. We also saw overseas weakness in export orders—they were down 6 to 47.5.
So the question is could we see another recession. Manufacturing has hit a rough patch and the service sector is also slowing. The ISM Non-Manufacturing Index fell from 53.7 in May to 52.1 June, the lowest reading since January 2010. It is still above the magic number of 50 but the trend is not favorable. Particularly concerning are the retail numbers: Some of the major retailers like Target (TGT), Macy’s (M) and Costco (COST) are seeing their sales stumble a bit. Other discretionary lines of business like clothing, restaurants, and jewelry are starting to see disappointing results.
Some good news is that construction spending is up an improvement in housing. So housing stocks could see a bit of a lift along with REITs. Construction spending rose 0.9%, including a 3.0% rise in residential spending. Construction spending will lend support to sagging GDP.
The unemployment numbers remain elevated but appear to be stabilizing, which suggests growth may in progress even if it’s at a snail’s pace.
Around the globe we continue to see major easing by the Central banks. The European Central Bank cuts its key rate by 25bp to a record low of 0.75% – this was no surprise. The Bank of England up their Quantitative Easing which also wasn’t a surprise considering the UK’s continued recession. The biggest surprise was the People’s Bank of China cut its key rate 25bp to 3% and its one-year lending rate by 31bp to 6%. The move suggests China is growing increasingly worried about its economy.
In light of no real progress in the global debt crisis I am still drawn to telecom, utilities, health care, and consumer staples – things people buy even in the toughest of times. Consumers won’t shut off the heat and electricity, won’t stop eating food and buying the necessities, they won’t skimp on the prescriptions, and will continue with their love of smartphones and cell phone services. I don’t want to sound like a broken record but remain defensive, look for companies with strong dividends. We are focusing on companies who pay at least a 3% dividend so we can get paid cash flow while we wait for capital appreciation. This growth and income strategy is perfect for this choppy market.
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