WEATHER DELAY, BUT THE RECOVERY IS ON, from Bob Doll, vice chairman and chief equity strategist for fundamental equities, BlackRock

Recent economic weakness in the United States has come largely from home sales, goods orders and unemployment claims. Last week’s sore spot was consumer confidence, which experienced a sharp drop, although we would point out that the data was not consistent with other consumer surveys, and we believe might be an aberration. Business confidence levels have been trending upward, which suggests that the broader economy continues to improve. In the housing arena, prices have been slowly recovering, with the sharpest rebounds seen in California and the Southwest.

Of all the economic data, employment trends remain the most critical. The jobs picture will determine whether this recovery is sustainable. At present, we believe corporate earnings and balance sheets are supportive of companies increasing their payrolls. We have already seen improvements in productivity and business sales figures, and we think jobs growth should also resume in the months ahead. We had hoped to see a turnaround in February data, but the many weather issues that have plagued much of the country have made this less likely.

Overall, we would paint the economic picture as one that includes strongly rebounding manufacturing activity; moderately improving consumer spending; a still-depressed housing market; ongoing declines in bank lending; slow progress on the employment front; and downward trending inflation. In sum, we continue to believe the economic recovery remains intact, but will produce mixed data and ongoing uncertainty. From an interest rates perspective, we maintain our view that the Federal Reserve is likely to raise the Fed Funds target rate by year-end, but, at this point, is still awaiting meaningful improvements in the labor market.
At present, investors are caught between the crosscurrents of lingering debt and deflation concerns and fears over premature monetary policy tightening on one hand, and signs of improvements in economic growth and the corporate earnings landscape on the other. It comes as no surprise that we have been witnessing increased back and forth in stock prices over the past several weeks, as this bull market has matured since last year. We expect to see continued uneven trading in the markets for the time being, but maintain our belief that the positive factors are a sign that there is still long-term upside potential for higher-risk assets.

THE LONG UNWINDING ROAD, from Liz Ann Sonders, senior vice president and chief investment strategist, Charles Schwab & Co., and Brad Sorensen, director of market and sector analysis, Schwab Center for Financial Research

Stock market action remains relatively choppy following the correction we saw at the beginning of February. Despite a strong earnings-reporting season, we saw markets pull back in a noticeable way—a development we believed was overdue. Investor sentiment, according to our favored Ned Davis Research Crowd Sentiment Poll, had moved into extreme optimism territory, typically a bearish indicator for the market.

Following the pullback, sentiment corrected quickly and is now positioned for a renewed market uptrend. While we don’t believe the sharp gains we saw last year are going to recur, we remain relatively optimistic and don’t believe recent action is anything more serious than a healthy correction and consolidation of gains. We urge investors who need to increase their equity exposure closer to their target do so using dollar-cost averaging.

Helping support our optimism is continuing improvement in some important economic data. Manufacturing, which tends to lead the economy, has seen steady improvement. The Institute for Supply Management manufacturing index for January came in at 58.4—its highest reading since August 2004, and both its new orders and production indexes were above 60.

Additionally, industrial production rose 0.9% in January, while during the past seven months it has increased 9.7%. According to ISI Research, that’s well above the rate of increase in the first seven months of the past four recessions.

The improvement in the manufacturing sector has played a part in the overall economic recovery, which continues as illustrated by the Index of Leading Economic Indicators (LEI). The index improved again in January, marking the 10th straight month of improvement—the most consecutive positive readings since 2004 and up 9% year-over-year, the largest annual increase since April 2004.

There are areas of the economy that are still lagging the recovery. Initial jobless claims (a leading indicator), after falling precipitously, have leveled off at a still-troubling level. We continue to believe a job recovery is pending, but renewed weakness in claims needs to be watched to see if it’s more than just weather, as has been suggested by the Labor Department.