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Economic Realities Halt Spring Rally

Heading into the summer, the market digested multiple doses of reality as more economic data paints a different picture than that suggested by Wall Street's furious rally over the past few weeks after reaching bottom in March.

Initial jobless claims, a key barometer in measuring the labor market, fell a meager 12,000 to 631,000 in the week of May 16th. More importantly, continuing claims swelled another 75,000 to 6.662 million. Although workers filing for initial jobless benefits have stabilized, those currently out of work are finding it increasingly difficult to find new employment. Impending joblessness is expected to keep rising with auto layoffs in the pipeline. The unemployment rate as reported by the Commerce Department hit 8.9% in April and most expect it to rise past 10% this summer.

Industrial and basic material stocks were hammered during Thursday's session after the Philadelphia Fed's General Business Conditions index edged lower to a reading of -22.6. On a positive note, the decline in the headline index was the slowest pace of contraction in several months. New orders for goods remain weak, depressing a modest and somewhat curious uptick in confidence. Even though unemployment is showing no signs of abating, consumer sentiment has been improving steadily since March.

Lurking in the background is crude's precipitous rebound off its low hit earlier this year near $30/bbl. The U.S. Department of Energy reported crude oil stockpiles fell by 2.1 million barrels in the May 15 week to 368.5 million. Previous builds in inventories had served to hold back a rise in petroleum prices, but last week's draw down suggests the supply side is weakening. Gasoline stockpiles fell a sharp 4.3 million barrels, presenting additional pressures to retail gas prices. Refinery capacity was a weak at 81.8% of total capacity. Energy trades moved swiftly following the report, driving the front month crude contract above $60/bbl. Low energy prices had served as a modicum of relief for beleaguered businesses, but it looks like inflation is being piped back into the forefront of cost pressures for firms.

Housing remains at the crux of economic hardships. The U.S. Government reported housing starts for April dropped to a new record low, down 12.8%.

Poor housing data has served to resurface concerns regarding the health of banks - which had been at the forefront of the Wall Street's unremitting rally in March and April – and are now acting as a drag on the broad market. The KBW Bank Index soared 123% from the March 9th low to May 8th. Since then, it is down 17%; over that same period of time, the S&P 500 is off more than 4.5%.

Are we nearing the end of a bear market rally or is Wall Street simply suffering from earnings fatigue, pausing to take a breather before another move higher? Real world realities, like rising unemployment and contracting manufacturing activity, are hinting at further labor pains for a retrenching economy.

Conversely, improving consumer sentiment and a tidal wave of fiscal spending are propping up long-term prospects.

- by BetterTrades Financial Analysts