The water torture that the market has been dealing with over the past few weeks has finally broken the dam. Thus far, the impact is not as bad as headlines are depicting to be. They will all blur in the morning, but there's no doubt that a lot of investors are blinking today... including us. I closed a lot of potions based on preserving gains and mitigating risk- not an indictment on the market, but I want to have lots of cash if the market rolls over even further. We are not panicking and appreciate that the vast majority of calls and emails are about whether or not to buy the dip. It just might be too early to purchase on the dip. It would be best to buy near the bottom, not during the decline. We live for this, and will let you know when it’s time to begin buying.

A Mixed Bag of Economic Woes

By Jennifer Coombs, Research Analyst

It’s not a positive tone at all being set for the new month as all of the major equity indices are being hit hard on a variety of fronts. Firstly, in Europe the PMI data out this morning shows that the German industrial sector is contracting for the first time in 15 months, suggesting miniscule growth in the region this year. Airline stocks are getting hit hard today, first because the FAA is requesting the replacement of 1,300 Boeing cockpit displays, and second, a new case of Ebola in the US has travelers fearful of flying. Protests are still raging on in China, although many CEOs and regional experts suggest that they won’t amount to anything more than a temporary disruption. Here in the US, the market is digesting a lot of data, primarily the ADP employment numbers. ADP's estimate for private payroll growth for September is 213,000 versus the consensus estimate of 200,000 and a revised 202,000 for August. The corresponding consensus for Friday's jobs report from the government is 215,000 versus August's 134,000, but we shall see how accurate the result will be. In the meantime, the market is suffering for additional reports released mid-morning.

Firstly, construction activity in the US unexpectedly reversed to the downside in August by -0.8% after a +1.2% rebound in spending in July. Economists were looking for a reading of +0.5% for August, so the result is quite disappointing. The monthly decline was led by the private, nonresidential sector which was down 1.4% after a 1.3% increase in July. Public spending on construction also declined in August by 0.9% after jumping 2.1% the month before. In addition, private residential spending declined only 0.1% after a 0.4% increase in July, but ultimately we view this component as favorable. Weakness was primarily in residential (excluding new homes), where the subcomponent declined 2.0% after climbing 0.2% in July. On a positive note, new one-family outlays increased 0.7% in August after a 0.8% decrease in July and new multifamily outlays rebounded 1.4% in August after a 0.5% decline in July. New private residential outlays have been looking healthier over the last two months. Versus last year, total outlays were actually up 5.0% in August, but were up higher in July at 6.9%. Construction outlays continue to be volatile on a monthly basis, but on a yearly basis construction is improving… albeit not at the robust pace from earlier in 2014.

Next in the broader manufacturing space, we received the two final PMI readings for the month of September from Markit and ISM. The latter is more closely followed and the composite activity showed a slowdown for the month, but remains solid at 56.6. Consensus was calling for a reading of 58.0 which was slightly below the August reading of 59.0. Growth in new orders was noticeably down for the month, but remains at a strong reading of 60.0. However, backlog orders fell into a contractionary level at 47.0. Employment slowed 3.5 points to 54.6, and there was a slight acceleration in prices paid, up 1.5 points to a reading of 59.5. Both of these components are graphed with the ISM reading below. A solid gain in the production component (to 64.6) is important and points to a solid gain in the manufacturing portion of the industrial production report. Other than this, the components are indicative of a softening in September off of very strong summer readings.

Markit’s take on the manufacturing sector showed steady growth in September at 57.5 which was only slightly lower than the 57.9 reading in August and the mid-month flash reading. Details in the report describe the rates of output and new order growth as strong. Unlike ISM however, the employment component was stronger posting a 2.5-year high. Other details included an increase in new export orders which are currently at a 3-year high. The chart below shows how the Markit and ISM readings compare over the last 10 months.