Stocks are sustaining the positive momentum from Friday and are on track to end the first quarter of the year on a positive note. But it has been a tough quarter for the market, with stocks not that far from where they started the year despite plenty of movement. Many expect the rest of the year to be a lot better, but the market’s Q1 performance could very well be a sign of things to come.
Doubts about the economy have been at play in the market’s tentativeness as well. The U.S economy did reasonably well in the second half of 2013, but lost momentum at the start of this year, with weather getting all the blame for the slowdown. The hope is that we will get back to the second-half 2013 trend line in the coming days with the Spring thaw.
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To that end, this week’s data should give us a better sense of the underlying economic momentum in March when weather was less of a restraint. Of particular importance are Tuesday’s manufacturing ISM survey and Friday’s non-farm payroll reports that will tell us if the economy has moved past the weather induced air pocket. The Chicago PMI coming out a little later will give us a preview of what to expect from the national manufacturing ISM index coming out tomorrow. The ISM index fell sharply in January, rebounded in February and Tuesday’s March reading is expected to show further improvement. With respect to Jobs, last month’s reading (for February) wasn’t that bad, but Friday’s report for March is expected to be get us back to the pre-Winter trend line.
Weather has effectively washed out Q1, but the picture is expected to markedly improve 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’s recent tentativeness is likely a reflection of some doubts about this optimistic outlook.
