Don't look now, but the economy may be in for a bumpy ride. A spate of disappointing economic data has left market gurus prognosticating everything from a temporary soft patch to the beginnings of another downturn of even greater magnitude than the one we just lived through. While investors shouldn't be pressing the panic button just yet, they should be aware that we've probably got some bumpy road ahead.

Trouble brewing
Signs from many economic quarters show that the economy has hit a lull. Manufacturing, perhaps one of the hottest sectors of the economy, has cooled off in recent months. The ISM manufacturing gauge fell to 53.5% in May from 60.4% in April, the biggest one-month drop since 1984. The May payroll report was incredibly disappointing, with the economy creating just 54,000 jobs, far less than is needed to even keep pace with population growth. And housing prices appear to have taken a fresh turn south, prompting calls of a double-dip in the housing market.

But while recent data have been disheartening, it's still too soon to make any definitive call on whether this is a temporary lull or a sign of greater underlying weakness. No doubt higher gasoline and commodity prices, as well as supply chain disruptions from the natural disaster in Japan, are partly to blame for the slowdown.

Still, it would be premature to write off the current soft patch as completely transitory. One thing appears to be certain: Whether we've just hit an air pocket or are in the early stages of a new downturn, growth this summer will be exceedingly bleak. With the stock market registering five consecutive down weeks now, investors need to be prepared for further volatility.

Downside protection
One of the first things all investors should do is re-examine their current portfolio and see how their current asset allocation measures up. You shouldn't invest any money in the stock market that you may need to access in the next five years. This is especially important for folks in or close to retirement. You need to have a cushion of living expenses readily available to you that won't be affected by short-term stock market swings.

Likewise, don't make the mistake of yanking your money out of the stock market and stuffing it back into Treasuries. More conservative investors will, of course, need to have meaningful bond exposure, but if you've still got several decades until you retire, you need to be heavily invested in stocks. Bonds are almost certainly at the tail end of their bull market run and yields on Treasuries aren't particularly attractive right now. So don't weigh down your portfolio with bonds if you're still relatively young.

Fishing in shallow waters
While no sector of the market will be completely insulated if the market's current malaise persists or worsens, investors need to realize that the next few quarters of stock market activity aren't likely to be a rising tide that lifts all boats. In other words, the easy money is gone and you need to direct your money toward more attractively priced sectors that offer more room for growth. It's been beaten to death in the press, but one of the most relatively undervalued areas of the market continues to be dividend-producing large caps. Not only are these names selling at a discount compared to their smaller-cap peers, but if the economy does tank, these companies will be in the best position to weather the downturn.

While financial names have traditionally provided meaningful payouts, most cut their dividends in the wake of the recent crisis. As a result, investors have had to look elsewhere for yield. Fortunately, many names in the consumer sector offer reasonable yields, including Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO), both of which sport yields around 3%. And while you may not think of technology as a high-yielding sector, many blue-chip tech firms are now selling at low P/Es while offering decent payouts. Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM) are two prime examples.

If you want diversified exposure to these types of companies, consider low-cost exchange-traded funds such as SPDR S&P Dividend ETF (NYSE: SDY) or the Vanguard Dividend Appreciation ETF (NYSE: VIG). Both funds offer exposure to firms with a long history of making, and increasing, dividend payouts.

The economy is on somewhat shaky ground right now. Growth is almost certainly going to be subpar in the coming months. Growth could rebound in the fall, or it could fall apart -- it's just too soon to tell. Don't head for the hills, but make sure you ready your portfolio for the greater challenges that lie ahead.

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