The major indices finished a choppy week on a mixed note as stocks sagged on chilly economic data. While the S&P 500 and Dow moved lower, the Nasdaq Composite posted its third weekly gain on upbeat news in the tech sector. For the week, the S&P 500 lost 0.1%, the Dow slid 0.3%, and the Nasdaq added 0.5%.[1. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-february-18-2014.htm]
The unrelenting winter weather that has inundated large swaths of the country is also having a chilling effect on the economy. Manufacturing fell drastically in January as the harsh weather curtailed production in some parts of the country.[2. http://www.reuters.com/article/2014/02/14/us-usa-economy-output-idUSBREA1D0XW20140214] The housing sector has also been affected, with existing home sales falling 5.1% in January, to the lowest level since July 2012.[3. http://www.forbes.com/sites/erincarlyle/2014/02/21/existing-home-sales-fall-5-1-in-january-2014-to-lowest-level-since-july-2012/] Construction on new houses plummeted 16.0% in January as the weather disrupted groundbreaking activities.[4. http://www.cnbc.com/id/101427355]
On the positive side, weekly unemployment claims fell last week as fewer Americans filed new claims for jobless benefits. This suggests that labor market conditions are improving, despite two straight months of weak hiring and unseasonably cold weather.[5. http://www.cnbc.com/id/101429221]
The seasonal chill may also affect some corporate profits in the first quarter. While consensus estimates put first quarter profits at a 5.0% increase for S&P 500 companies, expectations have deteriorated dramatically; profits are now expected to be up an anemic 1.5% across the board.[6. http://www.cnbc.com/id/101425864] That number could fall further as more companies reduce their earnings guidance due to weather disruptions.
So far, the stock market has been willing to look past these seasonal factors because investors hope to see a spring back when the weather warms up. However, what if the polar vortex is just exacerbating existing weakness? With so many seasonal factors affecting the data, it’s hard to know how markets are going to react. We’ll likely experience increased volatility as analysts struggle to see through the noisy data, but it’s too soon to know for sure how the long-term trends will shake out.
What lessons are there for long-term investors this winter? Seasonal variations can play havoc with the best-laid plans. Savvy professionals watch and wait for the noise to subside so that we can look at the fundamentals underneath. As always, we’re looking for good tactical investing opportunities in the volatility. If you ever have questions about seasonality or other cyclical market factors, please give us a call; we’re always happy to be a resource for you.
Monday: Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: J New Home Sales, EIA Petroleum Status Report
Thursday: Durable Goods Orders, Jobless Claims, Bloomberg Consumer Comfort Index, Janet Yellen Speaks at 10:00 AM ET
Friday: GDP, Chicago PMI, Consumer Sentiment, Pending Home Sales Index
Data as of 2/21/2014
Standard & Poor’s 500
U.S. Corporate Bond Index
Data as of 2/21/2014
Treasury Yields (CMT)
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Japan’s factory output rises. Japan’s industrial output likely grew in January and inflation hovered near five-year highs, increasing hope that the economic recovery continues. Japan’s factory output, which closely correlates with Gross Domestic Product (GDP), grew an estimated 3.0% last month.[7. http://www.reuters.com/article/2014/02/21/us-japan-economy-output-idUSBREA1K0GK20140221]
Milk prices may skyrocket in March. Dairy analysts estimate that milk prices could increase by as much as 60 cents in March, reaching their highest prices ever. Shortages in cheese supplies are pushing demand for milk to record levels; moreover, 2013 increases in feed costs caused farmers to cut back on herd growth, compounding shortage issues.[8. http://www.cnbc.com/id/101424954]
China manufacturing output sinks to 7-month low. Activity in China’s factories shrank again in February, reinforcing concerns of a slowdown in the economic giant and spooking Asian investors. While the Lunar New Year festival may have affected data, it could foretell lingering weakness in the Chinese economy[9. http://www.reuters.com/article/2014/02/20/us-china-economy-pmi-idUSBREA1J03V20140220]
Facebook bets $19 billion on WhatsApp. The social media giant will buy the fast-growing mobile messaging startup for $19 billion in cash and stock in a landmark deal. Facebook executives hope that the move will put them closer to the growing mobile segment of social media users.[10. http://www.reuters.com/article/2014/02/20/us-whatsapp-facebook-idUSBREA1I26B20140220]