polar-vortex-financial-marketsExtremely cold weather in many parts of the country has made life challenging for many of us.  The polar vortex created colder temperatures in more parts of the midwest than in Antarctica and for those not suffering from cold, such as in the southwest, drought conditions pose a different set of challenges.

Financial markets weather

Foul weather has also come over financial markets following a tranquil 2013. The weather turned frosty in early January when monthly jobs gains fell short of expectations after averaging gains of nearly 200,000. Cold weather that began in December may have adversely impacted the jobs report by keeping individuals from working.

Emerging Markets

More recently a perfect storm has developed over emerging market countries. Weaker economic data from China, political instability in the Ukraine, Argentine, currency devaluation, along with currency concerns from Turkey, Venezuela, and India, raised fears about the stability of emerging economies. These fears grew acute as the Federal Reserve reduced bond purchases in January.

Financial weather forecast

Thankfully, the January chill will subside and financial markets are likely to thaw along with it.  The U.S. economy, by far the world’s largest, remains resilient. The weaker-than-expected December 2013 jobs report has not been corroborated by other economic data, which generally remain positive.  In the last days of January we learned that the economy grew 3.2% in the fourth quarter of 2013, continuing its acceleration. We still expect economic growth, as measured by real GDP to reach 3% in 2014, based upon many of the drags of 2013 fading, including U.S. tax increases and spending cuts and the European recession, and growth accelerating from additional hiring and capital spending by businesses.

Importantly, profit growth among U.S. companies, a key driver of stock prices over the long run, remains strong. With almost half of S&P 500 companies reporting, corporate earnings are on pace to grow 8% for the fourth quarter of 2013, suggesting that the acceleration in corporate earnings that began during the third quarter of last year continues. We still expect a 10-15% gain for U.S. stocks in 2014, as measured by the S&P 500 Index. (Derived from earnings per share for S&P 500 companies growing 5-10% and a rise of half a point in the price-to-earnings [PE] ratio.)

The Fed’s unanimous decision in late January to further reduce bond purchases while also not mentioning emerging market weakness is a vote of confidence for the U.S. economy. The Fed’s move was widely expected in a year in which policymakers, including those in Congress, will have less influence over financial markets. After agreeing to a two-year budget deal in December, well in advance of a mid-January deadline, we expect Congress to come together to avoid another debt limit showdown in coming weeks. Already this year, Congress has come together to pass several bills, including an omnibus budget for 2014, in a bipartisan fashion. In a midterm election year, Congress is unlikely to want to draw another bout of negative publicity witnessed last October.

Investors questioning whether the economy can stand on its own will likely translate into passing storms in the market this year.  As growth in the economy and corporate earnings heats up in 2014, we expect the chills investors got in January to fade.  As always, if you have questions, I encourage you to contact us.

img credit:  NASA Goddard Photo and Video