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Encouraged by unexpectedly strong jobs data, U.S. indexes touched record highs Friday, as buyers shrugged off fears of slowing growth in Europe and China and focused on the improving strength of the U.S. economy. Unlike the springtime sell-offs of the past three years, the Dow passed the 15,000 mark only to close slightly shy of the mark, while the S&P 500 crossed the 1,600-point mark and held. The catalyst for the rally was a report from the U.S. Department of Labor, showing that employers added 165,000 jobs in April and that the unemployment rate fell to 7.5 per cent, its lowest level since December, 2008.

As good as the numbers were, they weren’t enough to raise concerns that the U.S. Federal Reserve will take their foot off the gas petal by easing back on the stimulus in the form of bond buying or quantitative easing (QE) — a powerful elixir that is credited for powering a five-year bull market. The S&P 500 has now risen by 13 per cent in the first four months of 2013, putting it on track for the best yearly performance since 2009, when markets were recovering from deeply oversold territory.

But despite the stock market soaring to new highs, investors remain deeply sceptical about the staying power of the current rally, since a noticeable disconnect has opened between the economic fundamentals and the market. As U.S. stocks continue to rally, the underpinning supporting their strength, are becoming increasingly shaky. Much of the rally we’ve witnessed so far has been assisted by the Fed and other central banks, and in the tug of war between monetary and fiscal policy, monetary policy is beginning to wane as central bankers to run out of ammunition.

During the past week, the European Central Bank cut its key lending rate to a record low 0.5 percent and the market yawned. No one is under the illusion that in a continent where youth unemployment in Spain is a staggering 57 percent, that a 25 basis point cut to historically low interest rates will be enough to jump-start the sclerotic European economy. Despite easing credit conditions in the Eurozone, business loans have been falling on an annual basis with businesses reluctant to expand into a contracting economy.

Successive rounds of QE and record low interest rates have forced investors into equities driving the stock market higher. The S&P 500 suffered its worst decline of the year in April, when the market fell 3.3 percent before recovering quickly. Last year, the S&P 500 fell nearly 10 percent between April and June and in 2011 it fell more than 19 percent between April and October. But for now, this rally seems to have a mind of its own.

Global economic data has been disappointing since the beginning of April with commodities taking it on the chin. In April, gold slumped 7.6% while copper was down 6.3% and Brent fell 7%. In the U.S. , job and economic growth remain sluggish, while manufacturing activity continues to expand, but at a slowing rate and while housing is in recovery mode, access to credit is still poor. Corporate earnings are beginning to run out of steam, with top-line growth looking increasingly anaemic. With markets fully pricing in a best-case scenario, the likelihood of the market hitting expansive new highs from current levels looks increasingly dubious.

While I’m cheering on the rally, I’ve adopted a defensive over cyclical stance in my portfolios for more than a month. I continue to favor investments in utilities, pipelines, consumer staples and telcos over cyclical sectors such as materials. And while the multiples appear lofty for many of the defensive names I am buying, investors are likely to continue to be rewarded as long as global growth remains subdued. If global growth begins to accelerate, cyclicals will undoubtedly outperform defensives. The driver of cyclical performance will be improving rather than deteriorating global PMI data. In the U.S. , the April manufacturing ISM came in at 50.7 and momentum has been moderating since the February peak of 54, suggesting a defensive or cyclical bias for investors.

To date the defensive over cyclical strategy appears to have been a savvy bet, with defensives outperforming cyclicals by more than 6.6% year to date and by 8.2% over the past year. Once the disconnect between the fundamentals and the lofty market levels of late gets reconciled, look to overweight cyclical sectors within your portfolios as my research has shown that the most powerful stock market rallies feature strong performance by cyclical sectors such as materials and financials.

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