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Scott Maxwell - Thursday, August 01, 2013

The economy is bumping along in the right direction judging by the most recent release from the Institute of Supply Management. The ISM releases their report on business each month and this month’s report showed a significant jump in almost all of the index components. Readings of above 50 on the various components of the report indicate expansion, below 50 contraction. While numbers can jump around quite a bit month to month this month’s report gets confirmation from other sources and tends to reinforce the message from other sets of data.

Todd Sullivan over at Valueplays has a bullish set of statistics that fall right in line with the ISM numbers here. But lest we get too excited, Henry Blodget over at The Business Insider sees the world a little differently. Confused yet? If so you are in good company. Truth be told no one knows just exactly what our economy will do over the next couple of years. But we do know a couple of things:

  • Net-net economies grow over time. Which means that betting against growth is a very short term strategy.
  • Growth in the economy is cyclical, it doesn’t happen in a straight line.
  • It’s really hard to predict exactly what will happen over the near term.

Since markets are forward looking it’s the anticipation of certain events that moves them one way or another. And of course those anticipatory moves are even harder to predict than where we are in the business cycle. So we diversify, and hold assets that perform differently in various sorts of economic environments (isn't it nice to think of not having all your eggs in one basket?). We watch valuations because this measure tends to correlate very highly with future returns. And of course we keep our eye on all the indicators above!

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