The equity markets are getting nervous with the S&P 500 almost 6% off its high, foreign equity markets down at least that much or more and emerging market currencies slipping and sliding. Normally in such moments there are two opinions: the correction is here versus the economy is solid so don’t worry. Were the weather warm and sunny, the don’t worry advice would probably rule the day.
The problem is that this winter in much of the US it is unseasonably cold, wet and snowy and that will chill the economy. Auto sales for January were down from December and below analysts’ forecasts. The ISM Manufacturing Index was down from 56.0 to 51.3 while the ISM Prices Paid series popped up to 60.5 from 54.0. All negative news for the markets. Economic releases often seem to follow the herd – if a few indicators are weak early in the monthly cycle, the rest of that month’s reports are as bad or worse. There are a couple of explanations for this pattern. First, on a month to month basis, the weather really does matter. Shopping days lost to snow and rain means excess inventories which mean reduced orders. Further, most of the data series are a mixture of hard numbers and estimates in the initial release; after a month or two there are revisions. The next few economic reports may be no better. Add to this the Fed’s continuing roll back of QE3 and it looks like the economy won’t do anything good for the markets.
There may be one reprieve on the horizon: Friday’s employment report for January including payroll growth, the unemployment rate and annual revisions to the payroll survey. December was a weak report and many argued that it was far weaker than reality, so we could see a bounce back in this release. The annual revisions are likely to boost the numbers for 2013 as well. The unemployment rate is less followed than the growth in payrolls and for now that may be just as well. The unemployment rate has been dropping not because people are getting jobs, but because they are leaving the labor force. In any event, the predictions seem to be around 185,000 to 190,000 for payrolls and little change in the unemployment rate.
As to whether the market is correcting or just suffering from the January snows, only time – and hopefully a warmer February – will tell.