Dion Money Management Blog   Money Management for Retirees and Their Families

The stock market seesawed this week, showing that it could rally past the July highs but that it was still vulnerable to incoming data and seasonal weakness. August is traditionally a choppy month that has yielded a net gain on average over the past 25 years. Investors tend to grapple with the strength of a summer rebound and the volatility that typically ensues in the fall months before seasonal strength returns by November. Each year is different, of course, and right now we must balance attractive valuations and solid earnings with elevated macroeconomic risks.

After last week’s reading of second-quarter gross domestic product (GDP) showed that growth moderated to a 2.4 percent annualized rate, this week’s Institute for Supply Management (ISM) data held some promise that the soft patch could end sooner than expected. According to the ISM non-manufacturing results, new orders and employment increased allowing for the composite index to reach 54.3 from 53.8 in July.

Today’s unemployment data was underwhelming due to a mix of seasonal factors and a large decline in temporary government jobs, yet private payrolls did manage to grow by 71,000, and the unemployment rate held steady at 9.5 percent due to a decline in participation rather than robust job gains. There was a silver lining for the employed as both hours worked and aggregate payroll earnings increased.

So the question that most analysts and investors must answer is whether the moderation of growth in GDP will merely represent a soft patch—a normal stage in the recovery cycle—or a precursor to a recessionary dip. After all, every recession since 1950 has shown some degree of moderation after initial growth spurts that were typically brought on by fiscal or monetary stimulus. Although the duration of these setbacks averaged 10 months, the range has been anywhere from four months to 18 months.

As both the monetary and fiscal stimulus measures that were implemented in 2008 and early 2009, respectively, begin to fade, private domestic demand must pick up the slack and carry the recovery forward. Given that manufacturing gains have been somewhat subdued and corporations are cautiously moving forward, there is reason to believe that any economic downturn would be less than the average duration of prior recessionary setbacks. Discretionary spending is at low levels historically, providing ample room to surprise to the upside once employment and income levels rise further.