Market Update: Dow Jones Today Fights Back as IMF Sees Increased Risks to World Economy

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  )  fought back into positive territory in early afternoon trading, rising five points, to 16,135, as of 1:30 p.m. EST after housing starts in January came in well below analyst expectations and the International Monetary Fund updated Group of 20 finance officials on the risks seen for the world economy.The S&P 500 (SNPINDEX: ^GSPC  ) was down less than one point to 1,839.

G-20 finance officials received the IMF note at about noon today; it comes ahead of the Feb. 22-23 meeting in Sydney, Australia, of finance ministers and central bankers from the G-20 nations. The IMF had previously forecast world economic growth of 3.7%, up from 3% in 2013, but said the recovery remains weak and is threatened by recent currency volatility in emerging markets.

The report highlights, "Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern." It adds: "A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity."

Inflation has remained well below central bank targets in both the U.S. and the European Union. However, it has been picking up somewhat in Japan, which is fighting 20 years of sustained deflation. The IMF said it believes the U.S. Federal Reserve needs to better cooperate with foreign financial officials, as its economic stimulus pullback announcements have led to an exodus of funds from emerging markets, hitting those who are funded by debt hardest. The report says, "Strengthened and cooperative policies would deliver stronger, more balanced, and sustainable medium-term growth while reducing risks of renewed global turmoil."

Before the report was released there were two U.S. economic releases that weighed on investor optimism.

Report

Period

Result

Previous

Producer Price Index (PPI)

January

0.2%

0.1%

Core PPI

January

0.2%

0%

Housing Starts

January

880,000

1.05 million

Building permits

January

937,000

991,000

The one to pay attention is the housing starts report for January, which came in at a seasonally adjusted annual rate of 880,000, well below analyst expectations of 945,000 and 16% below December's upwardly revised level of 1.05 million. This finding follows a string of poor reports on the economy, and the housing market in particular, most of which have been blamed on the terrible winter seen in U.S.

While the economy looks like it is slowing down in the short term, the larger story is still unchanged. The stock market is overvalued, and earnings look cyclically high. That said, predicting where the broad market will go in the short term is a game for fools (with a lowercase "F"). Stocks can always get more overvalued. When things get frothy, it's worthwhile to build up some cash on the side for when prices inevitably fall.

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