SPX_2014_02_14By David Nelson, CFA

After taking a standing 8 count in January, U.S markets have battled back close to break-even for the year. Europe is in the green and some countries like Egypt have had explosive moves higher. If you asked professional investors at the start of the year which part of the world would lead market returns, I doubt many would have pointed to the Middle East. Emerging markets are still the problem child and after a meteoric rise last year, Japan is in full correction territory down over 11% YTD.

World Returns YTDWorld_Markets_2014_02_17

In Just 7 Trading Sessions S&P is Up 100 Points

ISM_2014_02_03Weak economic data and some headline earnings misses sparked the concern here as investors headed to the exits. The ISM (Institute for Supply Management) release on Feb 3 triggered a more than 300 point decline in the (DOW) as investors fled risk assets worried the economy had lost all momentum.

Despite losses in January and a rough start this month, in just 7 trading sessions the S&P has quietly tip toed higher more than 100 points to all but erase the red from our screens. Technical analysts have brought out a parade of indicators to dismiss the market’s comeback including a chart comparing current markets to 1929. Despite these concerns, investors once again are being dragged in kicking and screaming.

After 2013 with little opportunity to get involved many were looking toward the dip as an opportunity to finally get long this market. Unfortunately, once the selling takes hold a pullback of 5% feels like a stopping point on the way to a 10% correction, which in turn takes us half way to a full blown bear market. Let’s be honest. We were afraid, and in the back of our minds are the dark memories of 2008.

For the last couple of decades, critics of the Fed often point to the implied put on the market. This contract of course is an insurance policy that they will use all measures necessary to insure market stability and that volatility only occurs on the upside. Like the launch codes handed from one President to the next, keys to the print shop are passed to the new Fed Chair.

It may not last long but for a little while it seems we have something much better. “The Weather Put.” 

The Weather Put


For the last several months, many parts of the nation have been battered by severe weather. Economists were quick to point out that the storms and arctic temperatures created a fiscal drag for the economy translating into dismal jobs numbers along with several weak economic releases. Weather was the scapegoat and blamed repeatedly during first quarter conference calls as retailer after retailer talked about a lack of foot traffic, all pointing to the skies as the likely cause.


Speed Bump?

It seems logical that the severe snow and ice storms battering half the nation would keep the consumer home and out of the malls. However, a more likely scenario is that the economy has hit a speed bump with weather explaining some of the issues but probably not the full story. The important thing is it doesn’t matter right now. You heard me right.

It Doesn’t Matter…

It doesn’t matter whether the recent economic weakness or the missed earnings were actually caused by bad weather or not. It only matters that we think it did. Perception and sentiment are powerful forces and for now the glass morphs from half empty to half full.

Even if the recent inclement weather is behind us it’s been the focus of investor attention and the economic press all the way through last week, which interestingly is the half-way point for the 1st quarter. Weather will be used by many companies as a scapegoat in 1st quarter earnings releases and conference calls which for the most part don’t start until early April.

As for the economic indicators, economists are already lowering the bar. Ellen Zentner of Morgan Stanley in a recent note said the following; “We have now abandoned our prior assumption that we’d start to see a rebound from January weather disruptions in February…” She goes on to say; “Eventually spring will arrive, and when it does we expect the economic data to initially be substantially boosted as conditions normalize.”

Of course unlike the Fed, the Weather Put has a finite expiration date which I’m pegging at the end of the 1st quarter. By that time, we’ll be long past the winter storms and the excuse that; the dog ate my homework will have little meaning.

Clear Sailing?

While some of the headline misses or poor guidance from the likes of Apple (AAPL), IBM (IBM) and Whole Foods (WFM) were disturbing others seem to be running full steam ahead. Disney (DIS), Facebook (FB), Google (GOOG) or Dow Chemical (DOW) didn’t once mention a polar vortex or an ice storm.

We are coming into the home stretch of earnings season with over 85% of S&P 500 companies having reported. According to Goldman the number of companies beating on the bottom line is coming in at 45%, just under historical averages of 47%. However, 37% are beating on the top line. That seems to be a relatively positive new dynamic that hasn’t been with us for some time.

The Call

Despite a few bumps and bruises, my base case on the market hasn’t changed. I still think the S&P 500 can close the year with a 7-10% return tracking projected earnings growth. Let’s call it 2000 in the SPX. Frankly, anything within 5% of that number and I’m declaring victory. Your time and ours is better spent digging beneath the surface focused more on individual companies rather than the overall market.

Funds managed by David Nelson are currently long shares of DIS, GOOG, FB & DOW