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Withering Roots (Again)?

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Daily State of the Markets 
Thursday, April 4, 2013

Good Morning. Part of my daily routine is to try and identify the drivers of the stock market action. And while there is likely to be some disagreement over what I deem to be the primary driver of the market from time to time, I think it is safe to say that at least one of the reasons that stocks have been rising this year has to do with the idea that the economy is improving. Note I used the word "improving" and did not suggest that the economy is doing well. No, the key here is that the economy is not at risk of recession at the present time, which is something that is a bit of a surprise to the macro bears.

This BTE (better than expected) theme has been a recurring one for the past three years. Each year for the past three years, the economic stats have come in above consensus during the early part of the year. And each year, the market has rallied on the idea that the economy may have finally turned the corner. Unfortunately though, the economy's "green shoots" have turned to "withering roots" by the time the "Sell in May and Go Away" season rolled around. And while Korea's blustering b.s. may have gotten some attention yesterday, it is the fear that the economy is going to experience yet another spring/summer swoon that caused the fast money to start hitting the sell button in earnest yesterday.

As faithful readers know, I am a card-carrying member of the glass-is-at-least-half-full club when it comes to the outlook for the economy and the stock market. However, I am also an analyst who prides himself on being objective. And the bottom line is that after surprising to the upside during the first quarter, the economic data has come in on the punk side lately. As such, I too am concerned that these green shoots might once again miss out on their potential.

As Exhibit A, I offer that yesterday's ADP report was the 5th economic indicator in past week to disappoint. It turns out that private sector job growth came in at 158K in March, which was a 5-month low and more than a little light compared to the expectations for 201K new jobs (as well as last month's 237K). So, while February totals were revised higher, March has to be considered a "miss."

Sticking with the employment picture, we also learned yesterday that the Rasmussen Employment index slipped 1.3 points in March, its third decline in a row. Then a separate report indicated that online help wanted ads fell 3.1% in March, which was the most in four years. And on a year-over-year basis, ad growth fell to the slowest level seen since January 2010. Ughh.

Yes, it is true that the slowdown in job market activity likely reflects a response to reduced government spending stemming from the fiscal cliff deal and the sequestration cuts. And no, this shouldn't be a surprise to anyone paying attention. But unfortunately, the "misses" haven't been limited to the jobs front.

Reports also indicate that the consumer isn't feeling it right now as Consumer Confidence dove to a reading of 59.7 in March from the 68.0 level in February. Ouch.

Next up, the ISM Manufacturing Indices, which is designed to be a proxy for the health of the manufacturing sector came in at 51.3 in March, which was down hard from February's reading of 54.2 and January's 53.1. While the reading was above 50 (an indication of expansion in the sector), the rate of growth is clearly slowing. In addition, the New Orders component dove to 51.4 from 57.8 last month.

The ISM Non-Manufacturing Index (an indication of the state of the services sector) fell 1.6 points to 54.4 in March, which was the lowest level in seven months. Economists had expected a smaller pullback of just 0.2 points to 55.8. Thus, this was the biggest "miss" in 11 months. Oh, and the employment component fell 3.9 points to a reading of 53.3, which was the most in four years. Are you sensing a trend here yet?

Given the sequester cuts and the recent headlines from across the pond, the fact that the data has been less than stellar shouldn't be surprising. However, given that (a) the economy isn't exactly hitting on all cylinders at the moment and as such doesn't have much wiggle room (economists are only looking for GDP growth of 2.2% in the second quarter), (b) the early economic strength has sagged for a couple years running, and (c) the stock market has become overbought (and everybody on the planet knows it), I can't really blame anyone who might wondering about a case of deja vu all over again.

So... will the recent economic green shoots blossom into beautiful and sustainable recovery this time around? Or will those shoots once again shrivel up and die - leading us to yet another period of market misery during the second quarter? Obviously, I don't have the answers. Thus, we will be watching every piece of economic data - including Friday's Jobs report - very closely. And while reviewing economic data may be dull, it is what the game is about right now.

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Turning to This Morning...

As expected, the Bank of Japan unvelied aggressive easing measures overnight. Across the pond, Spain held a successful bond auction, Portugal's government survived the confidence vote, and both the Bank of England and the ECB left rates unchanged. Here at home Fed Chairman Bernanke and Vice Chair Janet Yellen are both scheduled to speak today (Bernanke at 10:30 am eastern and Yellen at 5:00 pm). Stock futures are currently following Europe higher and are pointing to a positive open on Wall Street.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Shanghai: closed
- Hong Kong: closed
- Japan: +2.20%
- France: +0.85%
- Germany: +0.54%
- Italy: +1.48%
- Spain: +1.32%
- London: -0.19%

Crude Oil Futures: -$0.04 to $94.41

Gold: -$7.70 to $1545.80

Dollar: lower against the yen, higher vs. euro and pound

10-Year Bond Yield: Currently trading at 1.811%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +7.36
- Dow Jones Industrial Average: +65
- NASDAQ Composite: +10.11

Thought For The Day...

"You've got to be very careful if you don't know where you are going because you might not get there." -- Yogi Berra

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

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About the author

David Moenning is the President and Chief Investment Officer at Heritage Capital Management, a Chicago-based Registered Investment Advisory firm founded in 1989.

Dave is also the proprietor of "State" is an investment education website which provides free and subscription-based portfolio services as well as an abundance of market research, news, and investment insights.

Mr. Moenning began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years. Dave's work has been featured on, MarketWatch, Zacks, StreetInsider, MarketFN, and many other media outlets.

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