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Market Looking for Validation

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Friday, March 28, 2014

Today’s positive pre-open sentiment may not amount to much in the end. Stocks started out in the green in the last few sessions, but were unable to sustain the momentum as the sell-off in high profile tech and biotech stocks kept investors on their toes. Hard to envision the market resuming a meaningful uptrend without the participation of these high profile growth stocks.

The market’s tentativeness is likely reflective of uncertainty about the economic outlook. The U.S economy did reasonably well in the second half of 2013, but lost momentum at the start of this year. This morning’s data about personal income and spending was no different from tone of other recent reports that show the economy hitting an air pocket in the first quarter. Investors have resigned themselves to the weather explanation for the soft data at the start of the year, but expect to see data showing the economy springing back into action in the coming days.

Next week is important in this regard as we will get to see top-tier data for the month of March when weather was less of a restraint. Tuesday’s manufacturing ISM survey and Friday’s non-farm payroll reports will set the tone for the following days.

The market is looking for evidence that the U.S. economy is on track to graduate to a higher growth pace this year than has been the case over the last few years. The first quarter has essentially been washed out because of weather, but growth is expected to resume from the second quarter onwards,  with GDP growth going above the +3%-plus pace in the second half and continuing into 2015.

This favorable economic expectation is at the root of strong corporate earnings estimates as well. Not much earnings growth is expected in 2014 Q1, but the market is pricing in a strong rebound in the second half of the year and beyond. The market is looking for validation of these expectations and appears to be getting a bit nervous about it.

Sheraz Mian
Director of Research

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