Raft of Bad Economic Data Change Investor BehaviorIt’s been strange watching the Dow Jones Industrial Average and S&P 500 continue to march higher for the last few months, moving in direct contrast to the underlying economic indicators.

It’s hardly news to anybody that unemployment has remained stubbornly high for years. Personal debt is high, student loan debt is crushing, and the largest portion of debt goes to mortgages. Housing prices have begun to rebound, but they are still down 27.5% from their April 2006 peak. First-quarter gross domestic product (GDP) growth came in at 2.5% percent, far short of the predicted three-percent expansion rate. (Source: “Gross Domestic Product, First Quarter 2013,” Bureau of Economic Analysis web site, April 26, 2013, last accessed May 17, 2013.)

In spite of these signs, the markets have continued to climb higher.

Still, even the most ardent bears were turning a little bullish, afraid to miss out on additional gains. What’s important, I suppose, is that the markets are bullish. People don’t need to know why; they just want to take advantage of it.

But they should tread carefully, as a second raft of ugly data suggests the U.S. economic rebound is anything but healthy. Housing starts plummeted a stunning 16.5%, the most since February 2011, to a seasonally adjusted annual rate of 853,000 from a revised 1.02 million in March. (Source: “New Residential Construction in April 2013,” May 16, 2013, United States Census Bureau web site.)

Initial jobless claims rose unexpectedly for the week ended May 11 to 360,000, breaking a string of weekly declines. Analysts had forecast 330,000 jobless claims for that week. (Source: “Unemployment Insurance Weekly Claims Report,” United States Department of Labor web site, May 16, 2013.)

But hey, the bad economic news impacting the average American could turn out to be good news for Wall Street, as it means the Federal Reserve will continue to print money with reckless abandon in an effort to shore up the economy.

Some analysts think the bad news is just a blip and that deep down, the economic rebound is sound. Opinions aside, weak economic data and a rising stock market make it difficult to figure out where to invest.

For those conservative investors who have faith in the U.S. government, fixed-income assets like bonds will always look attractive. After last week’s data, the benchmark 10-year Treasury note on U.S. government debt jumped, pushing yields down to 1.86% on Thursday, May 16, from 1.94% the day before. The 30-year Treasury note dipped to 3.07% on May 16 from 3.19% on May 15.

Investors who think this is more than a blip might want to look at the ProShares UltraShort Real Estate (NYSEArca/SRS) exchange-traded fund (ETF). This ETF seeks a return that corresponds to twice the inverse (-2 times) of the daily performance of the Dow Jones U.S. Real Estate Index.

Investors who think the Federal Reserve will continue to support the economy and that housing starts will rebound might want to look at the PowerShares Dynamic Building & Construct (NYSEArca/PKB) ETF. This ETF tracks the Dynamic Building & Construction Intellidex Index. Some of the top stocks in the index include Pulte Group, Inc. (NYSE/PHA); The Home Depot, Inc (NYSE/HD); and Lowes Companies, Inc. (NYSE/LOW).

While the bad economic data put downward pressure on stocks, it hasn’t been catastrophic by any means. Why? Perhaps the market’s nascent run has more to do with the Federal Reserve’s generous $85.0-billion-per-month quantitative easing policies and artificially low interest rates than it does an economic rebound.

With the rally running on artificial legs, is there any reason for investors to change their strategies? If the economic data continue to be weak, they will. But until then…