The stock market turned down last week, so did the prices of non-investment grade bonds. The “junk” end of the debt market showed falling prices, widening credit spreads and a dramatic decrease in liquidity. (Conditions that often go hand-in-hand, but are troublesome nonetheless.) Subprime mortgage loans are the primary culprit.  The only surprise is how little attention the press is paying to these events.  Sounds like the perfect storm to me. We could be on the cusp of a full blown credit crisis.

 

The stock market did pay attention to earnings, as Caterpillar and Google will attest. Caterpillar’s results are instructive. The preeminent maker of construction equipment in the world reported strong international sales, offset by weak domestic demand. I think you’ll see a slowing U.S. economy and continued strong intentional growth repeated in the earnings of other Big Caps.  Slowing earnings growth will keep the stock market from going higher (see Earnings Matter). Stronger international growth causes me to repeat one of my favorite mantras – diversity your equity portfolio to include international funds (see A Yen to Diversify). 

 

The storm clouds have gathered and the prefect storm is upon us. If you haven’t reviewed the risk level of your portfolio and re-balanced to adjust for the great stock market rally of the past five months, do so quickly.