Slow economy weighing on stock market, finally

CHICAGO - The stock market comeback has proceeded at a rapid clip for more than two years. Yet the economic recovery has been frustratingly slow.

Now a spate of disappointing economic news is interrupting the market rally. It has money managers questioning whether the market can pull out of reverse and again leave the sputtering economy in its dust. If it does, credit the same factor that's driven stocks up 89 percent since their bottom in March 2009: record corporate profits.

It's a concern that will be top-of-mind at the annual Morningstar Investment Conference. The nearly 1,700 financial planners and fund managers in Chicago this week face a more complicated picture about where to put their clients' money.

It's hard to find any clear choices two years after the recession's official end in June 2009, with 9.1 percent unemployment, falling housing prices and weak consumer spending.

Stocks have fallen six weeks in a row. The Dow Jones industrial average slipped below 12,000 on Friday, the first time it has dipped that low since March. Many analysts think this slump is more serious than other pauses in the past two-plus years.

Chuck de Lardemelle, who co-manages a pair of stock-and-bond funds, IVA Global and IVA International, recently trimmed the stock holdings in his two funds to about 68 percent.

His chief concern: The recoveries in the economy and the market may be unsustainable unless consumers feel confident enough to spend more freely. Their spending is crucial because it drives about two- thirds of the economy.

"People aren't interested in expanding the house, or buying a new car, because they're in bad shape," de Lardemelle says.

Yet corporate profits remain at record levels, due in part to expense cuts made during the recession. That's the main reason de Lardemelle thinks stocks might continue their comeback, despite the challenges consumers face.

"It's the golden age of corporate profits," he says.

These indicators show the different paths the economy and the market have taken - and why fund managers are so concerned.

The economy

The economy is recovering at a slower pace than it has following past recessions. The nation's gross domestic product - the economy's total output of goods and services - grew 3 percent in the first 12 months of this recovery. That was about half the average first-year growth of 6.2 percent following recessions since 1949, according to Standard & Poor's Equity Research. The growth rate continued to lag the historic average in the just-completed second year of the recovery, and it is predicted to do so again in the third.