Unusually harsh winter weather has ensnared a large swath of the U.S. over the past several weeks. David’s commentary this week examines the effect this climatological pattern has had on the economy.
The question remains unresolved as to whether the economy has truly taken a softer turn or has been simply strangled in the grip of an interminable winter. So far, the betting seems heavily tilted toward the bad weather explanation, at least among equity investors. As long as it remains frigid in the east and dry in the west, we have a ready excuse, allowing us to look beyond the weak data to more normal climatological conditions when economic activity will presumably be better.
Stock investors have bought into that view. Last week, the S&P 500 enjoyed its strongest gain of the year, rising 2.4% and trimming its loss for the year to just 0.5%. There was little domestic economic justification for the move higher among last week’s reports. Retail sales, industrial production and weekly jobless claims were each weaker than expected.
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The overall data has now been soft enough, for long enough, that first quarter forecasts for GDP are beginning to be revised lower. By some estimates, this has been the coldest start to the year in twenty years, and that might be enough to explain it all away. If it is, and the weather returns to normal in the spring, we should expect to recapture much of the activity lost to start the year, which would be reflected in stronger second quarter economic activity. What makes this line of reasoning uncomfortable, however, is that it forces us to overlook the empirical evidence of current economic weakness and put our faith in the intangible expectation of a stronger future.
Apparently, bond investors have not fully embraced this view. The yield on the ten-year Treasury note ended last year at 3.03%. In early February, it fell to 2.58%. And while stocks are within a half percent of their previous highs, the ten-year yield is only back to 2.73%. The yield on the BofA/Merrill Lynch High Yield Master II index at 6.23% remains 16 basis points below its year-end close. Gold is up 10% since Dec. 31, as well.
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Optimistic Developments
In fairness, beyond the leap of faith in a brighter economic future, there were several tangibly optimistic developments last week on which investors could hang their hats. First, Fed Chair Janet Yellen’s testimony in Congress was confident, uneventful, and indicative of a steady hand at the helm. And while some might not like the prospect of further reductions in the pace of quantitative easing, there were no surprises.
From China we learned that trade activity was much stronger than expected, while inflationary pressures remained benign. If the trade data is believable, by no means a certainty, it dispels some of the concerns about slowing activity in the world’s second largest economy.
We also learned that the Eurozone expanded in the fourth quarter, the third straight quarter of growth after six quarters of contraction, reinforcing the view of an ongoing, albeit modest, recovery. In the U.S., fourth quarter earnings season continues to be better than expected. Roughly three-quarters of companies have now reported, and earnings are running about nine percent higher than last year’s fourth quarter. Importantly, top line growth has also improved. And measures of consumer confidence have held steady recently, despite the recent downturn in equity prices.
As this week gets underway, we are once again confronted by another weak data point. The February New York Fed report of manufacturing activity in the region was slower than anticipated, and was, of course, blamed on the weather. Unfortunately, as Charles Dudley Warner is said to have written in the Hartford Courant in 1897, “Everybody talks about the weather, but nobody does anything about it.”
Disclosure
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
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