When the financial news is bad (which it has been as we watched our elected officials play at politics while debating the raising of the debt ceiling) our clients begin to worry. Moneta Group's message doesn't change because the headlines are telling us to run for the hills. We still recommend sticking with a long-term strategy based on a diversified portfolio across multiple asset classes and strategies and, as always, we advise clients against making decisions driven by fear. But when global economic news is grim and the market is falling, that might not be what our clients want to hear.

The facts of the situation are often less exciting and sometimes more complex, and they don't usually make for great headlines, but they are important in helping clients understand our thinking. We believe this is what you expect from us; information about what we think of the current situation.

Here are some thoughts on the broad economy from Chief Investment Strategist Bill Hornbarger. Over the next several days he will address the bond and equity markets in separate communications:

"To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties." --Economist Paul A. Samuelson

The big concern, and one that has increased after last week's GDP report, is the future trajectory of both the U.S. and global economies. Clearly, in recent weeks, the economic data is decelerating, adding to the current anxiety. Data that is coming out has typically been below consensus, and the weakness has been relatively broad-based. Having said that, it is consistent, for the most part, with what we have seen all year. Confidence is and has been weak. Housing is and has been weak. Employment is and has been weak. Manufacturing here and abroad is still growing, just not at as fast a pace as early in the year. I think there are a couple of things that most people aren't paying attention to that are mildly encouraging. Based on the latest data available, the index of leading economic indicators continues to improve (up the last three months) and both corporate profits and earnings continue to improve. Typically, corporate profits are a really good indicator of economic health and have, historically, turned down prior to a recession. Currently, that is not the case, as they continue to expand. I think it is also important to note that recessions typically happen when credit is tight or getting tighter. Right now, we have easy and abundant credit as exhibited by 0 percent interest rates, very low corporate (and other) bond yields and tight risk premiums in both high-grade and high-yield bonds. It's also important to note that high energy prices directly impact the consumer's pocketbook. Crude oil is down more than $30/barrel since spring and retail gasoline prices are also declining. If these lower prices 'stick' it will reduce the headwind for consumers and the economy overall.

So if the stock market is a 'discounting machine,' what is it discounting? Without a doubt, fear. People are worried that the economy will roll over, back into a recession and take corporate earnings along for the ride. They also continue to worry about 'contagion' as it relates to the economic picture in Europe. These fears come at a time when confidence is already very weak, and after a bruising fight over the debt ceiling that left few people happy and U.S. policy makers looking like children in a playground battle. Those fears are legitimate and based on issues we need to monitor closely. However, I don't think it is a foregone conclusion that the economy will fall back into recession. Stocks more than doubled from the March 2009 lows to the April 2011 highs.  It would be normal to expect a correction, and healthy-sized correction, after a run-up like that. Another thing I think may be in play is the fact that it is full blown summer vacation time, meaning many trading desks are half-staffed and often by less experienced people. They are a group that probably doesn't want to hold a lot of 'risk' assets right now in light of current weakness and volatility.

I am concerned about the velocity of this decline. I would be much more concerned if earnings weren't coming in very positively, valuations were more stretched, credit was tight, and the Fed wasn't pumping liquidity. I have two other thoughts/observations: Stocks have fallen below several trend lines, including the 200-day moving average. Something like that can feed on itself for short periods. Second; where will it end? No one knows. However, if you look at historical price patterns, there was buying last summer when the S&P was in the 1025–1050 range. Using a conservative earnings number for the S&P (say $90) those levels coincide with 11-12 times earnings and roughly a 25 percent correction in stocks from the highs. That isn't a forecast, but simply a frame of reference.

In addition, as it relates to the markets, a number of things are rolling over at once. Oil is sharply lower and despite the strength in gold, the Commodity Research Bureau Commodity Index (a broader measure of commodity prices) is now negative for the year and all while global stocks are very weak. That smacks of momentum-based selling or a concerted strategy of "risk off" by the hedge fund community, which could be accelerating the downside momentum in the short term.

Finally, rebalancing might be a good strategy now. Bonds have had a huge rally alongside this latest volatility, and stocks are down 16 percent over the past 11 trading sessions. The long Treasury bond is up more than 13 points over the same span! This might not be the bottom for this move in stocks, but I think these are two moves that deserve taking advantage of in the form of rebalancing.