The Stock Market Doesn't Need The Economy To Surge

The S&P 500 gained a notable 1.7% last week, and it sits just points from its all-time high.

This comes as U.S. economic data continues to signal a spring slowdown. Q1 GDP grew at a slower pace than expected, durable goods orders disappointed in April, and the housing market is showing signs of slowing.

Meanwhile, the current earnings season continues to be less than stellar.

Experts have offered two interesting theories for the persistent stock market rally, which we will get to a little later.

This week will be loaded with economic data and earnings announcements from around the world.

Top Stories

Here Comes The Fed - The members of the Federal Open Market Committee meet this week to set monetary policy. They already have their foot on the gas pedal with quantitative easing and all of their other efforts to keep interest rates very low. But with the economy showing signs of slowing, will they get even more aggressive?

"While the Fed will acknowledge the recent pause in the data since the March meeting, the slowdown is not large enough to warrant any major changes to the FOMC communique," said Deutsche Bank's Joe LaVorgna. "The June FOMC meeting would be the more appropriate time to reexamine the QE program given that the Fed will have two more payroll reports as well as updated economic forecasts."
Can A Tweet Break The Market? - Last week, a false AP headline hit Twitter that read "Breaking: Two Explosions in the White House and Barack Obama is Injured." Within a matter of seconds, the stock market collapsed almost faster than a trader could say sell. A few seconds later, the AP and others confirmed that the headline was indeed false, and the markets came all of the way back.

Thanks to the recovery, people don't seem to be too concerned about the wild volatility. Nevertheless, some experts still worry about the presence of computerized trading systems that react to headlines in ways humans don't.

Economic Calendar

Personal Income And Spending (Monday): Economists estimate that income grew by 0.4% in March, while spending climbed by just 0.1%. "We already know from last week’s GDP data that real consumption rose at an impressive annualised rate of 3.2% in the first quarter, so the interest in March’s personal spending and income data will be to see just how sharp the slowdown in spending was at the end of the quarter," said Capital Economics' Paul Dales.
ISM Manufacturing (Wednesday): Economists expect the headline number to come down to 51.0 from 51.3 in March. "We expect little change, with manufacturing down slightly and non-manufacturing up slightly," said High Frequency Economics' Jim O'Sullivan who's looking for a 51.0 reading.
The Jobs Report (Friday): Economists estimate that the economy added 145k nonfarm payrolls in April, up from 88k in March. "Last month, notable losses were recorded in manufacturing, retail trade, trade, transportation and warehousing and government," said Wells Fargo's John Silvia who has a 150k estimate. "Despite initial jobless claims slightly higher in April than in March, we do expect employment to bounce back a bit this month, but not up to the 200,000-plus job gains we saw earlier this year."

Market Update

So, with the recent economic data disappointing and earnings announcements lagging, what's driving the markets?

Analysts have advanced at least two interesting theories.

1) Cash Return: "[D]uring the current earnings season, US corporations continue to announce dividend increases and more share buybacks," said stock market guru Ed Yardeni as he rationalized the rally. "Previously, I’ve shown that this corporate cash flow into the stock market--which totaled $2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012--has been driving the bull market since it began."

2) The End Of Austeriy: "Some traders ... think that the new rally really kicked in when news that a graduate student had found flaws in the Reinhart/Rogoff paper on the limiting power of public debt on the economy – thus casting doubt on that thesis," said UBS's Art Cashin. Cashin is talking about UMass grad student Thomas Herndon, who has basically turned the global austerity movement into a joke.

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