Filed Under:
Tickers in this Article: WMT, HD, TGT
Monday, February 24, 2014

The market remains within striking distance of getting back to its early-January peak despite a persistent run of weak economic data. Investors appeared worried a few weeks back, concerned that the long-feared correction had finally gotten underway. But that was not to be, at least not yet, as they started looking at the ongoing economic slump as nothing more than a weather-induced hiccup.

The question now is whether we should expect the market to continue its recent uptrend or we should brace ourselves for a period of sideways movement till the economic picture clears? I am more in the latter camp.

The market has given the U.S. economy a pass, putting all the blame on the frigid winter. The explanation makes sense. In the absence of weather, it’s hard to justify the loss of momentum in the U.S. economy this year. The economy’s growth pace had materially picked up in the second half of the year, prompting many to extrapolate the growth trajectory into 2014 and beyond. But then it lost steam, with the labor, manufacturing and housing sectors all starting to hiccup.

The same story played out on the retail sales front, with the polar vortex responsible for the January miss. Even Wal-Mart (WMT) partly explained its underwhelming performance on the harsh winter. It will be interesting to see if the weather issue will show up in the results of other major retailers reporting results this week like Target (TGT) and Home Depot (HD).

As reasonable as this weather explanation is, we should remain open to the possibility that something else could be going on in the economy as well. After all, the weather explanation isn’t in-sync with all recent data. 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. Data coming out this week, particularly the housing and manufacturing data, isn’t expect to be any better. In fact, we will have to wait at a minimum for March data coming out in April to confirm the weather issue.

What this means is that stocks regained their position and remain on track to reach the January peak with the help of this weather explanation. Further gains from here onwards would require moving past the lingering economic questions and a complete restoration of the earlier favorable macro outlook. But it will take us at least another two months to get there, during which stocks wouldn’t have any catalyst to help them build on recent gains.

Sheraz Mian
Director of Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

comments powered by Disqus

Trading Center