February 12, 2014 | By Scott Minerd, Global CIO
The cold snap in the eastern United States is continuing into February and could have a dramatic impact on economic output. Interesting research from Bank of America shows that adverse weather could reduce first quarter economic growth by 1-2 percent. Our analysis below shows the negative effect of frigid Januaries on retail sales. The potential economic damage from storm after storm raises the prospect that the U.S. Federal Reserve could slow its pre-stated tapering course.
If we see real evidence of a U.S. economic slowdown, more liquidity from the Fed can be expected. Investors still have faith in the Fed’s ability to make further accommodations, as evidenced by how the U.S. stock market took last Friday’s tepid jobs report for January in stride. This development takes us back to the "Alice in Wonderland" world where bad news can be good news for stocks and bonds.
The near-term risk is to the downside for U.S. 10-year Treasury yields, which could fall from the current level of about 2.76 percent to closer to 2 percent. Not so long ago, at the end of December, the 10-year rose above 3 percent and many investors presumed rates would continue rising in a secular bear market for fixed income. How quickly things change.
The effects of December’s frigid temperatures have already been seen in recent U.S. economic data releases. With January temperatures more than three degrees colder than average, it is likely that economic activity will continue to be depressed in the first month of the year. Retail sales show a particularly strong correlation with temperatures in January, suggesting that data for January will likely show restrained growth.
Source: Haver, Guggenheim Investments. Data as of 1/31/2014.
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FEATURED PERSPECTIVES
Risk assets will likely enjoy another rally while the Fed stays on hold, but the pause will only allow excesses to become more pronounced.
Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.
What would be a normal seasonal correction is turning into the worst December selloff in equities since the Great Depression.
VIDEO
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
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