Beware rising expectations.
Much of the current rally in U.S. stocks—the S&P 500 Stock Index was up 10% from the February 8 low as of the close yesterday, March 16—is based on a belief that the U.S. economy will continue the strong recovery foreshadowed by the 5.7% GDP growth rate reported in the fourth quarter of 2009.
That belief got a boost yesterday when the Federal Reserve’s Open Market Committee said in its post-meeting release that business spending on equipment and software had “risen significantly.” (In Its January statement the committee had said only that such spending “appears to be picking up.”)
In addition, the committee raised expectations that the improving economy would soon start being felt in sinking numbers of unemployed. Yesterday’s statement said the labor market was “stabilizing.” In January it said only that the rise in unemployment was “abating.”
No wonder then that the consensus among economists is now that the U.S. economy have actually started to create new jobs in March. The number I keep hearing is a forecast for 300,000 new jobs in the month. (That will leave just a bit to go since 8.4 million jobs were lost during the Great Recession.)
If the economy delivers, great. It will encourage belief that the U.S. has turned a corner and reduce worries about the second half of the year. And the rally will continue.
But such optimism always carries the risk of disappointment.
And any disappointment on the jobs number will do damage to stocks since prices are already anticipating at least some of the good news.
The Bureau of Labor Statistics will release March jobs and unemployment numbers before the stock market opens on April 2.