Waiting for Winter?s End

Undoubtedly, the long cold winter season has many yearning for more pleasant weather. Despite a strengthening economy, the economic data over the past few months appears to have been weighed down by the snow and ice. Come springtime, I believe the data will reflect an economy that is in bloom. As market strategist Dave Rosenberg highlights, the Fed’s Beige Book indicated that “two thirds of the regions are expanding” with many of the twelve districts stating that “weather [had] depressed sales and production in an unusual way for this time of year.” [i] In fact, the word “weather” was mentioned 119 times in the Beige Book, which is the most (by far) that it has been cited in nearly 20 years. [ii] In addition to weather masking some of the economic improvement, average hourly earnings are beginning to show above-trend growth. Rosenberg adds “we have well over 30 percent of the sectors comprising the private sector labor market in the U.S. basically now at full employment levels and seeing wage pressures escalate.” [iii] The stock market has been acting like a leading indicator for the economy and we continue to see an upward sloping yield curve in the U.S., which is not indicative of a recession. In 2007, an inverted yield curve in the U.S. (much like the current SHIBOR yield curve in China) indicated an economy that was slowing (i.e. short term rates were higher than long-term rates).

There are additional positive signs for the U.S. economy. Per Citi analyst Tobias Levkovich, “capital investment intentions have increased in the past couple of months despite claims of a slowdown amidst weather distortions and regulatory concerns.” [iv] Although there has been increased stock buyback activity, the full year of 2012 showed S&P 500 companies “in excess of $600 billion in capex, more than 50% greater than the amount used for stock buybacks.” [v] The first nine months of 2013 exhibit a similar pace. Indeed, companies are investing significant capital in their businesses while also returning some cash to shareholders. Additionally, deleveraging by the U.S. consumer, which had stymied growth during and after the 2008 recession, has reversed course. As the labor market has strengthened and household net worth has been heading higher, consumers are no longer deleveraging, but releveraging. As households take on more manageable debt, commercial banks are not the principal lenders. Per Rosenberg, the large commercial banks are “losing market share to savings and loans, to the credit unions, smaller regionals and the new wave of peer-to-peer credit entities.” [vi] Hence, money velocity (i.e. the rate at which the money supply turns over) is actually picking up, as these forms of credit are outside of the “traditional banking system.” This is very bullish for a consumer-oriented economy and I expect to see the economic data reflect as much, as the winter comes to an end.

Finally, sentiment still seems a bit cautious. Public pension plans are reducing equity exposure, as evidenced by the California Public Employees Retirement System (Calpers), which is cutting its equity exposure and increasing its fixed income allocation.[vii] Although we may see some market volatility created by news headlines, much like the recent geopolitical issues, I believe the overarching theme of a stronger economy will continue to be bullish for U.S. equities.

The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC, a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.

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