The market is down pretty big today even though the debt compromise passed through smoothly. With yesterday’s bad manufacturing ISM number and bad GDP report from last Friday, market participants are worried that chances of a recession have increased. Another big issue weighing on the market is the rise in Spanish and Italian bond yields, raising the chances that these countries may have a problem funding themselves. I think that is why gold has continued to climb, although some part of the rise in gold is attributed to announcement by the Bank of Korea that it purchased 25 tonnes of gold over the last 2 months.
I think we are at an important juncture in the market, if we are truly heading into a recession then you could see another 10-15% drop from current levels. If we just remain in a soft patch with very minor growth of 1%+, I think we might be able to rally and go back to highs of the year based on good corporate performance. I am leaning on the side that we will avoid a recession and grow at a very slow pace. I think the safe way to play that is to first wait for some more confirmation that economic data is not deteriorating any more before buying. Luckily we are not going to be faced with much political uncertainty for the next few months. I do think some of the weakness in the data is due to the uncertainty created by the debt limit talks.