The Market Is Range-bound

US stocks dipped at the open this morning, but quickly turned around. Currently, the Dow is down 82 points but the S&P 500 is up .3% and the Nasdaq is up .5%. Bonds, however, are trading modestly lower in price as yields float up alongside interest rates. Investors are re-pricing Fed risk, which one can see in the 2-year US Treasury bill yield climbing to 4.79% from 4.20% this month.

Last weekend’s edition of Barron’s featured a cover story titled “The Wacky US Economy.” I think that’s a great way to characterize it. Certainly, investors have been largely and wildly incorrect in their predictions over the past year when it comes to economic data. Somehow we’ve defied recession predictions, though parts—homebuilding & mortgage lending, retail, manufacturing—seem to have suffered recessionary conditions last year. Other parts of the economy—jobs, consumer spending—are strong. The data have been characterized by crosscurrents, anomalies and lags.

The Federal Reserve claims it is “data-dependent” in its approach to monetary policy. Investors, too, have tried to invest based on economic trends. But that’s tough when few clear, persistent trends exist. CNBC Contributor and money manager Josh Brown’s take on the stock market is this: “February is a repudiation of January. And January was a repudiation of December. We don’t know what March data will look like.” In other words, we’re stuck in a trading range reacting to near-term economic oscillations. If that sounds too myopic, it is. Merrill Lynch’s Chris Hyzy is looking past the next few months, saying investors should reposition portfolios for the next cycle. “Weakness should be bought” to prepare for the next bull market, regardless of any near-term weakness.

I’d like to briefly summarize some economic crosscurrents we’re seen just this week. Pending home sales surged 8.1% in January vs. the prior month. The number of signed contracts to buy previously owned homes increased across all four regions of the country. Somewhat lower mortgage rates, which briefly fell back to 6.5%, probably encouraged activity. And we know that strong job growth, especially in the South, was a factor. But putting January’s strength aside for a moment, pending sales are still down more than 20% from a year ago. And since the end of January mortgage rates have rebounded to 7%. So we don’t want to read too much into one month’s data.

New orders for durable goods—a proxy for corporate capital spending—surprised investors with a 4.5% decline last month, reversing December gains. That headline sounds ominous, but it’s not. First, the weakness was primarily due to a dip in aircraft orders, which are notoriously lumpy. Stripping out aircraft and defense equipment, orders gained .8% on the month, and 5.3% from a year ago. So despite higher borrowing costs and widespread fear of a slowing economy, CEOs continue to invest.

And yet, manufacturing activity has slowed recently. A slew of purchasing manager surveys, like the ISM Manufacturing Index, suggest business is contracting. Regional data collected by private research firms and Federal Reserve banks in Richmond & Dallas confirm weakness. Yes, wholesale inflation is falling, but new orders, current production and employment gauges are also deteriorating.