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Notes on the Week Ahead

October 3, 2012

 The current direction U.S. economy is a highly debatable subject with mixed signals from a manufacturing sector which is clearly suffering from a global slowdown, to some key domestic industries, including home-building and autos, which appear to be on an upswing.
-David Kelly, chief global strategis, J.P. Morgan Funds

Debating the Economy

This Wednesday, the first of three debates between Mitt Romney and President Obama will occur.  According to the Commission on Presidential debates, the topics for this one will center on domestic policy and particularly the U.S. economy.

The current direction U.S. economy is a highly debatable subject with mixed signals from a manufacturing sector which is clearly suffering from a global slowdown, to some key domestic industries, including home-building and autos, which appear to be on an upswing.

Numbers due out this week should continue to illustrate these diverse trends.  The ISM Manufacturing Index, due out on Monday, should post a reading of close to 50, indicating neither growth nor decline.  Conversely, the Non-Manufacturing Index due out on Wednesday should be firmly in the expansion zone, and Light Vehicle Sales, due out on Tuesday, could well post a new expansion high, lining up with many recent readings on the housing sector.

Employment numbers could act as something of a tie-breaker in assessing economic momentum.  Unemployment Claims should maintain last week's decline as the effects of Hurricane Isaac fade from the data.  Friday's Jobs Report should look quite similar to last month's with mediocre job gains, sufficient to maintain but not reduce the unemployment rate.

The pace of economic growth entering 2013 is debatable.  However, there should be little debate that the inability of Washington to agree on how it will avoid the fiscal cliff, provide for gradual deficit reduction and specify the basic outline of taxes and spending for 2013 and beyond represents a huge drag of uncertainty on the American economy.

A second point which should, by now, be beyond debate, is that investors can make money in long-term assets even when uncertainty persists.  Through the end of the third quarter, the S&P500 had provided investors with a handsome 16.4% total return on a year-to-date basis, with similar double-digit gains across all domestic investment styles and most sectors as well as many international markets.

This has been a year of tail risks and tail valuations and while none of the problems that confronted the global economy at the start of the year have been resolved, the success of central banks in reducing the risk of disaster, has made the extremely cheap valuations of stocks relative to fixed income unjustifiable.  This is still the case entering the fourth quarter suggesting that investors should still try to be a little over-weight risk assets relative to the historic safe havens of government bonds and cash.

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Monday,  October 1st

 

ISM Manufacturing Survey                        Forecast         Last

  Index Level                                                50.0              49.6

 

Tuesday,  October 2nd

 

Light Vehicle Sales                                   Forecast         Last

  Millions of Units, Ann. Rate                       14.6              14.5

 

Wednesday,  October 3rd

 

ISM Non-Manufacturing Survey                 Forecast         Last