Stocks Dip As Growth Slows


American stock investors have suffered no shortage of reasons to sell. Here at home, recent economic reports have surprised to the downside consistently, pushing the Citigroup Economic Surprise Index to its lowest level since August. As recently as March, after a string of better-than-consensus U.S. reports, the index was at a record high.

In Europe, as Greece threatens to default and voters in fiscally stronger nations voice increasing resistance to bailouts, bears fear the continent's 18-month debt crisis is reaching a tipping point. If Greece defaults, its banks may lose their ability to use Greek bonds as collateral with the European Central Bank, potentially crippling the Greek banking system — and setting off a contagion as investors scramble to reduce exposure to other vulnerable nations.

In Asia, a Chinese purchasing managers index reached a 10-month low, suggesting government efforts to slow bank lending and cool inflation may be starting to bite. Regional indicators of Asian trade volumes suggest the pace of growth has slowed in the industrial sector, a trend also seen in recent U.S. reports. In Japan, the March 11 earthquake and tsunami tipped that economy into recession and disrupted supply lines around the globe.

Modest pullback

Considering all the threats to growth and the 28% jump in the Dow Industrials from Aug. 26 to April 29, the market's pullback has been modest. Both the Dow Industrials and Dow Transports are within 3.5% of new rally highs, and even the formerly high-flying Russell 2000 Index of small stocks is within 6%.

A more substantial pullback would be consistent with an ongoing bull market, though we would be mildly discouraged to see breakdowns below the March 16 closing lows of 11,613.30 in the Industrials and 4,950.00 in the Transports. Ideally, we'd like to see the averages stabilize above those levels amid a drop in bullish sentiment and continued growth in expected corporate profits.

Consensus estimates for year-ahead earnings for the S&P 500 Index have risen every month this year, according to Bloomberg. With the per-share consensus now at $104.73, up from $96.92 on Jan. 1, the S&P 500 Index trades at less than 13 times forward earnings — a modest multiple relative to historical norms.

For now, with quality stocks available at reasonable valuations and the Dow Theory in the bullish camp, we're sticking with a mostly invested posture. Still, we will be quick to sell stocks that no longer rank among our favorites, and this week's changes lifted the cash position of our buy lists to 12% to 13.5%. Top picks include Apple ($332; AAPL) and MasterCard ($270; MA).

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