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Friday, February 21, 2014

Stocks have been up in 8 of the last 10 sessions, helping the market recoup most of its earlier losses and reach within striking distance of its all-time high at the start of the year. Driving this turnaround is the hope that the ongoing economic slump is nothing more than a weather-induced hiccup. This optimistic take has no doubt a basis, but it does leave the market vulnerable should the contrary explanation turn out to be correct.   

Investors have broadly accepted the weather explanation for the soft economic data. Whether it’s the back-to-back weak monthly jobs reports, loss of momentum in the manufacturing sector, or growing signs of a cooling housing market, weather has received the blame for everything. The same story played on the retail sales front, with the polar vortex responsible for the January miss. Even Wal-Mart (WMT - Analyst Report) partly explained its underwhelming performance on the harsh winter.

No doubt the weather explanation makes sense. The U.S. economy materially picked up in the second half of 2013 and everyone started extrapolating that growth trajectory into 2014 and beyond. It’s difficult to pinpoint anything, other than the weather, that could derail that momentum. The question then becomes whether the U.S. economy will simply go back to the second-half 2013 growth trend line once the skies clear or will it settle down at a much lower growth pace? The market’s strong performance in recent days leaves no doubt which way investors are leaning. But how reasonable are those expectations?

I buy into the weather explanation, but I do acknowledge that there is something else going on as well. Some of the recent data doesn’t seem to be in-sync with the weather explanation. For example, we saw negative revisions to the December and November retail sales data recently when Weather wasn’t problematic and housing starts were weak in the Western parts of the country where weather wasn’t a problem.

The Existing Home sales data coming out a little later today and New Home sales numbers next week will give us some more color on the housing front, but it’s unlikely that we will get away from the weather narrative any time soon. In fact, next Friday’s second look at Q4 GDP is expected to bring down the growth pace from the originally reported +3.2% to something below +2.5%.

On the earnings front, shares of Hewlett-Packard (HPQ - Analyst Report), Priceline (PCLN - Analyst Report) and Groupon (GRPN - Snapshot Report) will be in the spotlight this morning after they reported results Thursday evening. H-P and Priceline stood out in their reports, while the daily-deal site remained shy of expectations. The Hewlett-Packard beat gave further credence to hopes that the company’s turnaround remains in the place. The company is still facing a lot of issues, as are most legacy technology sector companies. But Meg Whitman has clearly steadied H-P’s operating performance and gotten it ready to capitalize on any incremental improvement in the macro environment.

Sheraz Mian
Director of Research

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