First Soft ISM, Now Soft ADP—Is the Stock Rally in Jeopardy?

Getty Images

Job seekers wait to speak to representatives of employers at a job fair at the Jewish Community Center in Manhattan in New York City.

First, a soft ISM, now a soft ADP.

March ADP at 158,000 was a huge miss over the consensus of 194,000; that is not a good sign for the nonfarm payroll report on Friday. Since ADP revised its methodology late last year, it has been much more accurate in its relation to the jobs report.

This is likely one of the main reasons we have seen a stock market at new highs, but with a very strange feature: consumers rule, cyclicals lag. Consumer index up 3.1 percent last two weeks, Cyclical index down 2.2 percent.

It's been all about Coca-Cola, McDonald's, Altria, and Procter & Gamble ... meanwhile steel and energy have been a mess, Bank of America and Citigroup trickle lower, while tech is mixed.

Why is this happening? There is good evidence that European investors are putting money into the U.S. markets; indeed, there is good evidence that the U.S. is where most international investors want to be. So why are consumer names in the U.S. outperforming cyclicals?

I think there are several factors at play:

1) The poor performance of China. Commodities and commodity stocks tend to move in line with China. Copper, for example, is down 8.5 percent year-to-date; the Hong Kong stock market is down 1.5 percent. This in a year when the S&P 500 is up 10 percent.

2) Investors are continuing to add exposure to stocks, but they are getting nervous about the "endless" rally. They are expecting some modest dip, but can't afford to stay out. So they are buying, but only the "safest" stocks (consumers).

3) There's a growing consensus that bullish forecasts of 3 percent to 4 percent gross domestic product growth in the second half of the year are unlikely to materialize. If we are at 2 percent to (at most) 3 percent, then buying defensive names gets exposure without too much risk.

I know this: If the weak economic readings keep up, it will indeed be "the end of 'the end of QE talk" by the Federal Reserve, as economist Robert Brusca noted.

Elsewhere:

1) March airline passenger traffic: US Airways said passenger traffic was flat in March, another disappointing number following on the disappointing 2 percent rise Delta Air Lines reported yesterday. US Airways also cited reduced government travel due to the sequester as a factor.

2) Japan's Nikkei closed up 3 percent, reversing two days of declines, as the Bank of Japan kicks off its meeting under its new chief, Haruhiko Kuroda.

—By CNBC's Bob Pisani