Time to Get Defensive

Unfortunately, this is merely the latest in a string of weak economic numbers. In early November, the ISM manufacturing survey came in at 51.2, below expectations and barely showing growth. In other releases, factory orders were weak, as were industrial production, housing starts, building permits and payrolls. Adding insult to injury, recent readings indicate that non-farm productivity gains have stalled.

It's Not All Bad

Of course, the numbers aren't all bad. The ISM non-manufacturing index was better than expected, and many consider that reading to be more important than its industrial counterpart, given the importance of the service sector to the U.S. economy.

Inflation numbers also continue to show that the inflation threat has diminished greatly. This has been corroborated not only by the consumer price index and producer price index readings but by the inflation components of the two ISM reports. Bond investors have also signaled that inflation is well under control -- despite the hawkish jawboning by the Fed -- via both the fall in absolute yields and the narrowing of the spread between nominal Treasury yields and the yields of the inflation-protected securities (TIPS).

The recent fall in energy prices has a lot to do with the fall in inflation readings and inflation expectations, and that has led to an increase in consumer confidence, the latest weaker-than-expected number notwithstanding. Retail sales were better than expected in September, but on the negative side, they were really nothing to write home about in October.