Despite the temptation to oversimplify a complicated world by being a bull or bear, we are sticking with the Mixed Bag theme we laid out for our subs many months ago. In an economy full of both positive and negative events, there is no other logical conclusion.
One of the major confusions in a choppy economy is the differing perspectives from our primary information sources. Currently, we are seeing this play out on a weekly basis as macro economic data continues to flash warning signals while bellwether corporations offer a rosier view.
For example, yesterday the Commerce Department declared consumer spending and income remained flat month over month. However, this morning I awoke to an earnings report from Toyota (NYSE: TM) stating global market conditions are improving and they are increasing their financial forecasts for the year.
These are just two examples of the daily “he said, she said” between economic data reports in corporate earnings announcements. So, who should an investor to believe?
Only one opinion matters: Mr. Market’s. In the case of a choppy economy, savvy investors know that each piece of big information has the potential to move the markets. If you look at a chart of the S&P 500 (NYSE: SPY), you can see that we’ve basically been in a trading range for the past year:
Notice how the markets took a spill from mid-April until earnings season started in early July. During that time, the sovereign debt crisis and other bleak macro economic data took center stage in the media. Then, as we all returned from 4th of July parties, surprisingly good and contradictory information came pouring out of companies such as Intel (Nasdaq: INTC), FedEx (NYSE: FDX), Ford (NYSE: F), Publicis, 3M (NYSE: MMM), Caterpillar (NYSE: CAT), DuPont (NYSE: DD), and many more.
This information was only a surprise to those who were not paying attention to guidance and comments coming out of corporate America. While there was no guarantees that earnings season on Wall Street would be decent, we knew we had to position ourselves as the spotlight switched to corporate earnings season. Blindly following an uber-bear like Robert Prechter or a perma-bull like Jim Cramer was simply bad for our health.
As we have noted many times before, a pure play the bull market is when both the economy and corporations are humming along to the same tune. Conversely, a pure play bear market is when both the economy and corporations are screaming the same horrors. Apparently, we are not in a pure play market where we can simply go long or short and then “set it and forget it.” Therefore, the winners in this type of Mixed Bag environment will be those who use a strong combination of common sense, agility, and the discipline to acutely listen to the message gaining the most attention in the moment.
So, the question is not necessarily whether we should believe one set of data over another. Rather, the question is who has the bully pulpit of the moment and what are they saying.
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