This is it. April and May will reveal if it's finally, truly springtime for the US economy after the nuclear winter sparked by the credit crisis.
An unease has crept into markets over the last two weeks after 10 weeks of one-way optimism to begin 2012. Bernanke's latest comments have been foreboding and economic data has been missing estimates.
It's important to note that the data misses have been on second-tier indicators like regional manufacturing and housing but that will change in the week ahead with the ISMs and non-farm payrolls on tap and corporate earnings close behind.
It's the start of a two-month period that is critical to the fledgling US recovery. The three biggest questions that need to be answered:
- Are recent improvements in hiring an consumer sentiment real, or skewed by good weather?
- Is housing near a bottom?
- Are we overly skeptical because of similar head-fakes in 2010 and 2011?
At the moment, Bernanke is itching to pull the trigger on more QE but a third round is unlikely to have the same positive effect. Granted, the knee jerk reaction will be to sell the dollar as QE3 is priced in - and maybe even to buy stocks - but it will be a very short-term trade.
The more lasting trade will be to sell risk assets as another downturn deals a punishing psychological blow to bulls who seem to have finally gotten the upper hand.
It's difficult to overstate the consequences if the economy stumbles:
- The rest of the world is depending on US growth. The US is expected to be the global growth driver this year with Europe in recession, emerging markets slowing and Japan flatlined.
- Upheaval in Washington. All bets will be off with the November elections, civil discord will spread and markets will fear the worst.
- Stocks have more room to fall than at any time since the crisis. The S&P 500 has built in significant growth expectations, including a 13% rise in the index so far this year, this growth premium could come quickly evaporate and spark cascading losses.
- Corporate balance sheets are in great shape and the latest CEO survey shows a willingness to invest but if the recovery doesn't come to fruition those plans will be scrapped in a flash.
From a trading perspective, expect larger than normal swings on economic data over the next two months. If the US falters, the Canadian dollar (FXC) will be square in the crosshairs with its Australian (FXA) and New Zealander cousins next in line. The opposite holds true if the recovery perks up.
My take is that the recovery will continue to gain strength but - just like Bernanke and the market - I will be uneasy until the strength is sustained into the spring.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.