Mixed Messages Persist, But Optimism Prevails

February is a short month, but nevertheless it generated lots for investors to digest. Market performance for the start of 2014 has been mixed, but February saw a general upswing with the market recouping most of its earlier losses. The Standard and Poor’s 500 climbed significantly, almost reaching its recent all-time high by the end of the third week in February. A variety of factors seem to have propelled the market upward, and investors seemed willing to blame severe winter storms for soft economic data that might have slowed the trajectory. Here’s an overview of major news and forecasts affecting the investment community.

• The good news is that the S&P 500 closed just short of its previous record, and the Dow Jones Industrial Average rose 3 percent during the first three weeks of February. NASDAQ showed an even greater upswing, with the index rising more than 4 percent. All this is in sharp contrast to January, when pundits began debating whether the markets were on the brink of a correction (which usually means a 10 percent decline or more). January’s worries about China’s economic slowdown and declining emerging markets seem to have moderated significantly.
• Some of the uptick can be attributed to the ever-present influence of The Federal Reserve Bank. The Fed allayed some major concerns when its new chairperson, Janet Yellen, stated that she planned to continue with the policies of her predecessor Ben Bernanke. Market experts hope this means that the Fed’s bond-buying program will be scaled back in a gradual manner. Investors remain on full alert waiting to hear Yellen’s next pronouncement.
• Early earnings reports lifted investor sentiment, with almost 75 percent of the companies that comprise the S&P 500 announcing earnings that beat the forecasts. However, it must be noted that – in general – revenue growth has been mediocre. Earnings disappointments have come from the retail sector, with several leading retailers yet to release their numbers. So far, investors seem to have taken bad earnings news in stride, blaming the Arctic weather for weaker performance.
• Investors also have been willing to attribute the recent weakening in hiring and the slowdown in manufacturing and the housing sector to the frigid weather of January and February.
• Some investment analysts are taking a wait and see position. Because of the impact of the winter storms, they think it might be three months before we see more reliable economic data.
• A report from the Fed in February showed that U.S. households had taken on $241 billion in increased debt in the fourth quarter of 2013. This number is an increase of 2.1 percent, which represents the largest quarterly increase since the recession kicked in. Should this increase be a cause for concern? Is this a sign of increased consumer confidence, or should we worry about consumers becoming over-leveraged? Economists can argue either position. On the positive side, the Fed’s statistics show that most of the debt – $152 billion – involves mortgages; and that the increase in mortgage debt involved borrowers with solid credit scores. Likewise, increases in credit card debt generally involved cardholders with good credit scores.

It’s fair to say that cautious optimism prevails. The pros want to see data that isn’t skewed by extreme winter weather. Job growth and unemployment numbers will be released in March, and perhaps they’ll cast more light on investment prospects.

As always, the above are general comments and are not intended to be a substitute for professional advice from your tax and investment advisors.

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