U.S. equity markets have returned to near-record levels, as investors place a bet that a recent series of weak economic data has a temporary cause: the cold winter.
The rally has all but erased the fear and instability that descended on stock markets last month and nearly eliminated January’s losses. The Standard & Poor’s 500 index reassumed its lofty perch, ending the day at 1,847.61, less than one point shy of its record close, while the Nasdaq composite closed at its highest point in nearly 14 years.
Investors seem to be less concerned about slowing monetary stimulus and increasingly confident about the U.S. economy, despite the absence of supporting economic evidence.
“There does seem to be a disconnect between equity markets and what’s been fairly broad-based disappointment on the economic front so far in 2014,” said Doug Porter, chief economist at BMO Nesbitt Burns. “I believe that markets are looking beyond the economic data, believing that the majority of weakness is weather-related.”
One of the most hotly disputed economic unknowns right now is the extent to which a brutal winter is to be blamed for a string of weak U.S. data.
Jobs growth missed expectations, retail sales and industrial production have been weak and the U.S. housing recovery has stumbled. Housing starts plummeted by 16 per cent in January from the previous month, but the declines were sharpest in the Midwest and the South, those areas also most affected by unusual winter weather.
“I think it’s fair to say that most of the weakness is bad weather,” said Eric Lascelles, chief economist at RBC Global Asset Management. “That explains why markets aren’t dropping.”
Exactly why markets are rising, however, is less clear. The extraordinary gains made by the U.S. market since the recession provoked concerns that stocks have overshot their fair values. Many market observers have said that a correction was overdue.
The turning point seemed to arrive in mid-January, when disappointing Chinese manufacturing results sparked a selloff. Also in January, the U.S. Federal Reserve Board began to pare back its bond-buying program, fuelling the emerging market meltdown.
“Investors feared that a significant slowdown in China could turn the simmering emerging markets crisis into a full-blown contagion,” Ed Yardeni at Yardeni Research said in a note.
From a Jan. 15 peak, the S&P 500 fell 5.8 per cent by early February.
Although no major advancement has been made to neutralize potential emerging market shocks, the panic has subsided, at least for the time being.
Over the past three weeks, the S&P 500 rose by 6.1 per cent to close less than 1 point short of a record high at 1,847.6 on Monday.
While investors may be either taking comfort in the absence of negatives, or willfully ignoring bad news, there are a number of possible positive contributors to the recent rally.
First, the new chair of the Fed, Janet Yellen, succeeded in quelling market concerns over tapering; the central bank has been reducing stimulus in $10-billion monthly increments.
“The Fed is still buying securities hand over fist,” Mr. Porter noted. “And of course policy is still ultra-easy in Japan and Europe.”
That stimulus is supporting a global economy that continues to grow, while the U.S. outlook is supported by less fiscal restraint in Washington.
“The private sector seems to have regained its vigour, helped in part by the return of confidence and the end of household deleveraging,” Krishen Rangasamy, senior economist at National Bank, said in a note.
Meanwhile, investors may have seen January’s slide as an opportunity to buy stocks at a bargain, she said.
Whatever the main cause, the streak will reignite concerns that U.S. stocks are overvalued.
“As you climb the wall of worry, the slightest scare causes a big reaction. We saw that in January. There are going to be more scares,” said Stephen Takacsy, chief investment officer at Lester Asset Management.
“You don’t know if a bubble is a bubble until it pops.”Report Typo/Error