Why the Dow Will Fall This Week


Making predictions is a fool's errand. Regardless of how prescient someone may appear, seeing into the future is simply beyond the competence of humans -- unless the person is Marty McFly, of course.

Yet it doesn't take a DeLorean DMC-12 to use currently available evidence to extrapolate about the future trajectory of events. So while I don't know anything more than you do about what will happen this week, or even this evening for that matter, it nevertheless seems clear that economic storm clouds are forming.

Global manufacturing is waning
Last Friday I went golfing with a friend who sells component pieces for industrial machinery. After lamenting about the regrettable state of each other's golf game, the conversation turned to work and the economy. According to his customers, orders are slowing and commercial and industrial operations are starting to respond in kind.

It shouldn't be a surprise to anyone that this is happening. Here at The Motley Fool, for instance, "Let's Say We're in Recession. Now What?" was the title of a recent and extremely popular column by the talented Morgan Housel. Even I have noted on numerous occasions how the fundamental economy appears to be sputtering.

What nevertheless caught my attention was the possibility a more marked deterioration appears to have taken hold just recently. Importantly, beyond my friend's anecdotal observation, a litany of economic reports out of Europe, Asia, and the United States all point to the same thing.

As I discussed yesterday, a survey of European manufacturers shows that the 17-member eurozone is in the midst of the "steepest contraction since June 2009." Meanwhile, at the end of last week, Japan reported its widest trade deficit since the catastrophe at the Fukushima. And reports from the Federal Reserve banks of Philadelphia and New York suggest that domestic manufacturing has recently taken a turn for the worse.

When will the market react?
If you've only been watching the markets, the fact that things are getting worse may not be obvious. While September is historically the worst month of the year for stocks, down an average of 2% over the past 12 years, the Dow Jones Industrial Average (INDEX: ^DJI) is currently up by nearly 500 points, or 3.7%, with only one week left to go. It's important to note, however, that these gains have been artificially fueled by easy monetary policy backed by central banks around the world. And as a result, it's less a question of whether the market will correct, but rather of when it will do so.

With this in mind, investors would be wise to use extreme caution when purchasing stocks in the near term. One sector that's been hit particularly hard is technology. Following Intel's (NAS: INTC) recent earnings downgrade, shares in Cisco Systems (NAS: CSCO) , Hewlett-Packard (NYS: HPQ) , and Microsoft (NAS: MSFT) have all taken a hit.

It's for this reason, in turn, that I'd urge investors to choose companies like the ones identified in our free report about three American companies that dominate both their respective industries and the world. These companies have the economic resources and geographical diversification that makes it possible to grow regardless of regional downturns. To download this free report instantly, simply click here now.

The article Why the Dow Will Fall This Week originally appeared on Fool.com.

Fool contributor John Maxfield has no financial stake in any of the companies mentioned above. The Motley Fool owns shares of Cisco Systems, Microsoft, and Intel.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and Intel and creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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