The Stealth Stimulus Rally

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Doug Roberts, Chief Investment Strategist for Channel Capital Research

NEW YORK (TheStreet) -- Santa Claus arrived late last year with the rally continuing. The S&P 500 finished with a positive return. This continued with a strong return for the start of 2012. Economic numbers are improving albeit very slowly.

What is the source of this economic improvement? Can it last? In 2012, will the rally continue or will a downward spiral start again; or are we perhaps in a broad, extended trading range? This is the subject of this month's commentary.

A Quick Summary of the Economic Good News

Economic numbers have improved during the last month. The ISM indexes for both manufacturing and services have increased indicating an economic recovery. Manufacturing seems to be coming back to the United States. The car industry also appears to be experiencing growth. This phenomenon is something that we have not experienced over the last 30 years. Retail sales were also quite strong.

The biggest positive news lies in the employment numbers. Nonfarm payrolls increased by 200,000, exceeding expectations of 150,000. The unemployment rate was also reduced to 8.5%, which was unanticipated. Average workweek and hourly earnings both increased.

This has led some commentators to say that we are finally at the start of the long-anticipated economic recovery. They believe that this recovery may be self-sustaining and bodes well for investment returns in 2012.

A Closer Examination of the News

In order to get a true picture of the implications of this news, we need to probe beneath the surface numbers to get a better understanding what really is happening. This is critical to determine if the current economic strength will continue.

If we look at the ISM reports, we see that the increases were quite modest. In both cases, the readings were only a few points above 50, which is the dividing line between expansion and contraction. Thus far, this does not appear to be the beginning of the "V-shaped recovery" that everyone has been forecasting.

Strength was also concentrated in ISM Manufacturing, which also exceeded expectations. ISM Services actually lagged expectations. Since the United States is primarily a service-oriented economy, ISM Services will need to show strength for the economic improvement to last.