As a result of the equity market's response to the weaker-than-expected ISM Non-Manufacturing report on Feb. 5—sending major indexes to big losses—investors now probably think those initials stand for "I'm Shorting the Market." Not only did the services index come in 8 percentage points below expectations, but it also signaled that the U.S. economy is currently in contraction. We believe that while the market had already factored in a mild economic recession, the ISM report has made investors begin to consider an even more severe contraction.
Prior to this worse-than-expected report, the Standard & Poor's 500-stock index had been experiencing a countertrend rally of almost 10% within a 16% correction (based on the Oct. 9, 2007, high to the Jan. 22, 2008, closing low) and a near 19% sell-off (based on the Jan. 23, 2008, intraday low). The market's partial comeback was aided, in our opinion, by the aggressive easing actions of the Federal Reserve, the likelihood of at least another 50 basis points of cuts over the coming two Federal Open Market Committee meetings, and the possibility of a swift passage of a government economic stimulus package.