The Economy Is Slowing

Warren Buffet has insights into the economy because of the hundreds of companies he owns and his contacts. The last two summers we had large swoons in the stock market, with recession scares that never materialized. Both years Warren Buffet said that he was not seeing a slowdown in the economy and he was correct. Buffet has changed his tune and said that growth was slowing in the US and that business in Europe was falling quickly.

Growth is slowing, earnings estimates are declining and we are in the summer months, which have historically been a weak period for the stock market. Given this backdrop I only want to trade from the long side when sentiment is at a pessimistic extreme. That is currently not the case as many sentiment indicators I follow are pointing to slight optimism.

I do not like the current risk/reward on the long side of the market but I also do not like the bear side. Current valuations leave room for an earnings slowdown. A large earnings slowdown will be difficult as there are few excesses in the economy and at corporations. I believe the best course of action is to wait until the bulls or bears push this market too far in either direction. We are down six days in a row so a bounce is certainly possible, if not probable, but I don't believe it will be great because of the lack of negativity.

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