One for the Doubting Thomases

04/19/2013 9:00 am EST

Focus: MARKETS

Ron Rowland

Editor, All Star Fund Trader

Last week's tepid economic report gave the doubters of the recovery some ammunition for their stances, writes Ron Rowland of All Star Investor.

Economic reports threw a wet blanket on the stock market recently.

The ISM March manufacturing report was the first culprit. It showed that factory activity is still expanding, although it is doing so at a much slower rate than expected. Next up was the ISM nonmanufacturing report, which fell to a seven-month low, catching most economists completely off guard.

By the end of last week, the ranks of traders still confident about the current economic prospects were growing thin, and the surprisingly bad March jobs report just bolstered the views of the doubters.

As usual, one must look beyond the headline numbers to get a true sense of US employment conditions. Prior to its release, economists were predicting the jobs report to show 193,000 new jobs-enough to keep the unemployment rate unchanged at 7.7%. However, the actual report fell far short of those expectations, with payrolls increasing by only 88,000.

Even though the number of jobs came up 105,000 short, the headline unemployment rate managed to fall to 7.6%. Once again, the reason for this discrepancy is the unusually large number of people leaving-or abandoning-the workforce. The Labor Department said that 500,000 people left the job market in March, bringing the labor-force participation rate down to 63.3%, its lowest level since 1979.

Stocks reacted negatively and bonds rallied, with the ten-year Treasury now yielding 1.7%.

Japan embarked on a massive quantitative easing effort that some analysts are calling the "2" plan. The goal: 2% inflation in two years that doubles the monetary base while doubling the Bank of Japan's bond purchases. The plan is nothing if not bold.

"Bold" is what Japan needs at this stage. The past 20 years of "not so bold" has not worked for the country. The new approach has its skeptics, but a senior dealer at Mizuho Corporate Bank gives it a "120" on a scale of 1 to 100, according to The Wall Street Journal.

Investors seem to agree. The Nikkei-225 soared 6.9% in the last half of last week; the yen plunged 5%; and the Japanese ten-year government bond yield fell to 0.44%. However, Japanese stocks fell earlier in the week while the yen rose, offsetting a good portion of the bullish move.

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