The regional manufacturing survey by the Philadelphia Federal Reserve for August showed a very sharp decrease. The index came in at -30.7 vs expectations of +4. This is a very sharp fall and even though it is just a regional survey, this kind of a drop sharply increases the risk that the national manufacturing data will also show contraction.
As the chart below shows this kind of number in the Philly fed was seen during the worst parts of the 2008/2009 recession and during start of the 2001 recession.
We haven’t yet seen this kind of negative data from other economic indicators like weekly unemployment claims but it does raise the risk we will start seeing more negative data points.
The Sell off in the market was already pretty large before the open and the release of the Philly Fed data and that was mainly due to stress in the European banking system. There are reports that one European bank had trouble raising dollars in the open market and had to go to the ECB to borrow $500 million dollars. The open market rates are lower than what the ECB charges, so the fact that the bank had to go to ECB means other banks were not willing to give it enough funds.
I think from a long term investing perspective the market offers good values at these levels. If someone has a time horizon of a few years they will probably come out positive. I think investors should focus on large globally diversified companies. From a short term trading perspective the market could still go further lower as the uncertainties in Europe play out and we deal with a higher probability of a recession in the US.