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With bull market creaking, is the economy to blame? Add to ...

It is easy to blame recent stock market setbacks on disappointing U.S. economic developments. Manufacturing in March missed expectations, and Friday’s payrolls report for March showed the weakest job growth in two years, contrasting with stronger job gains earlier in the year.

We’ve pointed out earlier that skeptics and optimists alike have argued that the U.S. economy doesn’t have to expand at full-throttle for the stock market to perform well. In fact, history has shown that the U.S. market has done better during periods with low rates of growth.

Even so, no one has quite given up on the economy just yet. James Hamilton at Econbrowser looks at the 88,000 job gains last month, notes that payrolls are one of the most important economic indicators and asks, “Is the recovery dying?”

He concludes that it isn’t. For one thing, initial estimates are often revised higher or lower in subsequent months – with higher revisions being the trend over the past couple of months.

For another, he argues that the three-month trend provides a better picture of the underlying employment trend because it gets around outlying months. The average number of job gains over the past three months has been 168,000, which is down from the fourth quarter of 2012 but an improvement over the second and third quarters as well as the average over 2010 to 2012.

“I think that the right take-away from the latest report is that U.S. economic growth is continuing at about the pace it has been – sluggish growth and high unemployment continue to be with us,” Mr. Hamilton said on his blog.

But the stock market could be digesting more than just a disappointing economics report. The S&P 500’s bullish streak, which has taken the benchmark index up some 14 per cent since November without so much as a 5 per cent retreat, looks vulnerable to some sort of pullback.

With the first-quarter earnings season set to start this week, many investors could be tempted to take some money off the table before results pour in. And anyone who can’t dismiss short-term patterns might find it hard to ignore the fact that stocks have dipped substantially in April over the past three years.

Bespoke Investment Group noted, though, that this latest bit of turbulence looks different from the others: “Typically when the market pulls back after experiencing a sharp rally, the stocks that went up the most during the good times go down the most on the downturn. That has been far from the case during this pullback,” they said.

That is, health-care stocks, consumer staples and utilities were the biggest winners during the first quarter, and they have been the most resilient so far during the second quarter. However, technology stocks and materials were the biggest laggards during the first quarter, and they have suffered the most during the second quarter.

Of course, even talking about the past week as an example of market jitters might strike some observers as a bit strange: The S&P 500 is down all of 1.3 per cent from its record intraday high last week. If that counts as turbulence, it says a lot about how smooth the market’s recent ride has been.

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