A Mixed Economy Will Soon Translate into the Stock Market

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

I think we’re in for a bit of a rollercoaster over the next several weeks. The stock market has already gone up in anticipation of solid third-quarter earnings. If the numbers aren’t great, then investors are going to sell.

We’re already beginning to see some numbers trickle in from different fiscal quarters. General Mills recently beat consensus Wall Street estimates, while Research In Motion recently missed on earnings. It will be a trader’s market for the next month and things will be choppy.

We’re also starting to see some economic numbers that aren’t so encouraging. To date, the economic data have been mute, but they have shown progress from the worst of times. There’s no doubt in my mind that we have a long way to go before a new economic trend takes hold.

Orders for durable goods (product expected to last at least three years) dropped in August, largely due to a drop in demand for aircraft. This is the second decline over the past three months in this widely followed economic gauge and it signals that the recovery in the manufacturing sector will be slow at best.

So, it’s a mixed bag of economic recovery in the marketplace. So far, since March, we’ve had a broad stock market advance in virtually all sectors of the market. What I surmise will happen is that the mixed recovery in the economy will begin to translate into the stock market over the next two quarters. This means that any advances will be more sector-related and this will hold the broader market back.

This is a reasonable expectation, I think. You can’t have a stock market appreciating every day while the underlying economy struggles in some sectors. This is why earnings season is so important — we need to see the current numbers and the stock market needs some new corporate visibility, so investors can determine a new outlook.

Unfortunately, a lot of big companies are still cutting production and jobs. This is particularly the case in the manufacturing sector. We’re nowhere near out of the woods yet when it comes to the Main Street economy. Just ask Warren Buffett. He knows. The Wall Street economy is all about speculating on the future. Wall Street has already spoken on its expectations for the future. If the numbers don’t materialize, then the recent gains on the stock market will disappear.