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TheStreet Open House

Stock ETFs Completely Decouple From U.S. Economic Concerns

NEW YORK (ETF Expert) -- Can we really attribute all of the horrendously weak economic data to icy pavements and polar vortexes? The Institute of Supply Management services sector report for February recorded its weakest data point in four years (51.6), posting a percentage decline that is the second worst ever.

In the same report, a sub-index on jobs showed that services sector employment actually contracted. Meanwhile, after-tax personal income for consumers dropped 2.7% from one year earlier -- a decline that rivals the struggles associated with 1973-1974.

It is not as if the U.S. economy has been registering a mixed bag of goodies. Most of the data have been strikingly poor. One might recall the ISM manufacturing sector survey for December plummeting by one of its largest percentage drops in its history, significantly contributing to the pullback in stock assets in the month of January. Others might recall the recent report on mortgage applications hitting lows not seen in nearly 20 years. Still others may recollect downward revisions to employment data and gross domestic product.

Granted, historically speaking, there is little correlation between a country's equity markets and the performance of its economy. However, there is plenty of evidence to suggest that fears of an economic downturn -- fears of inflation, stagnation, unemployment and underemployment -- often hurt stocks. Since nearly every equity segment is gaining ground and hitting fresh 52-week highs on Thursday (3.6.14), one can only wonder, "Where has investor uneasiness gone?"

The most obvious answer is the Federal Reserve's multi-year policy of electronic dollar creation and subsequent rate manipulation serves as a remarkable tonic for quelling bearishness on allocating to stocks. I definitely subscribe to the notion. After more than five years of zero-percent rates -- after numerous iterations of emergency level stimulus through unconventional bond buying programs -- Chairwoman Janet Yellen understands what investors need to hear.

"While the central bank's mandates of full employment and stable prices are clear, it is equally clear that the economy continues to operate considerably short of these objectives," she said. Translation? Regardless of what is causing economic woes, the Fed would consider modifying the pace at which it is slowing its bond purchases if their economic outlook softens considerably.

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