The action of the markets in the last week, particularly the internals as measured by industry, subsector industry performance and economic data releases, suggest that the greatest risks to the stock market may continue to be whether or not we are, in fact, in a recession. 

For awhile now, we’ve been of the belief that we’re not in one based on overall earnings levels excluding financial, decent although not stellar unemployment levels, and the fact that the yield curve is so steeply sloped.  However, we’ve also felt that the point may be moot given the poor performance of the markets this year already, and the opinion that the rewards of making the correct recession call may already be largely behind us.  

The downdraft in the markets earlier this week to new lows suggests that the risks may not be entirely behind us after all; however, the quick rebound suggests that this volatility may have more to do with a failure in the markets themselves — particularly the credit markets — than the economy at large.     

Regardless of whether or not we are in a recession, we finish the week believing that the benefits of a continued defensive posture are likely more behind us than ahead of us at this stage of the game.   Tomorrow, we’ll share our thoughts on playing more offensive ball.