02/19/14   Blame It On The Weather

Editor’s Corner

Ron Rowland

Might as well blame it on the weather, since everyone seems to be doing it.  From employment statistics to retail sales to corporate earnings reports, the weather is the most trotted out excuse.  Yes, it’s been a harsh winter, so it was really no surprise when housing reports hit the skids.  After all, homebuilders are required to work outdoors, and even potential buyers must leave the comfort of their current residence when seeking new shelter.

According to the National Association of Home Builders, U.S. homebuilder confidence dropped in February.  However, it wasn’t just any old drop – it was the largest one-month drop in history.  Known as the NAHB/Wells Fargo Housing Market Index, the three-part survey plunged 10 points for the month, from 56 in January to 46 in February.  Readings below 50 indicate more builders foresee poor market conditions versus favorable ones.

One of the index’s three components, views on current sales, declined 11 points to 51.  Still above 50, but now it’s at the lowest level since last May.  Another component, views on sales for the next six months, fell a more modest 6 points to 54.  The third component, prospective buyer traffic, erased 9 points to land at 31.  “Significant weather conditions across most of the country led to a decline in buyer traffic last month,” according to a statement from the NAHB.

Today, the Commerce Department said housing starts dropped 16% in January.  The pace in December was 1.05 million new homes annually.  Economists were forecasting just a 4.9% drop to 950,000 for January instead of the 880,000 figure reported.  That knocks the pace back to September levels and represents the largest one-month drop in 35 months.  New building permits also declined more than expected to an annual rate of 937,000.

Although many would be quick to blame the weather for this drop, housing starts in the frigid Northeast actually soared 62%.  It was the remainder of the country pulling the overall number down.  Starts fell about 13% in the South, 17% in the West, and the Midwest reported a huge 68% plunge.  Weather was a factor, but it wasn’t the only factor.  It’s “primarily about demand” according to the chief economist for real estate website Truila.

Meanwhile, economists are likely busy revising their February numbers lower.  Homebuilders stock prices have not been dramatically affected so far.  SPDR S&P Homebuilders ETF (XHB) and iShares U.S. Home Construction (ITB) today closed within 2% of last week’s highs.

Investor Heat Map: 2/19/14

Sectors

Anyone doubting the strength of Health Care in the face of the Affordable Care Act at the beginning of the year must be scratching their head by now.  Despite the uncertainty and ever-changing implementation dates of various Obamacare provisions, the Health Care sector has provided consistent market leadership this year.  Today, its widened lead over other sectors indicates it still has room to run.  Technology moved up a notch to second place as the formerly beleaguered semiconductor industry showed new signs of life.  Overhead resistance thwarted Utilities’ rally attempt in January.  The sector’s February advance is much stronger, allowing it to easily slice through the former resistance area and remain on the heels of Technology.  Real Estate fell from second to fourth while maintaining a steady uptrend.  Materials, Industrials, Financials, and Consumer Discretionary have been moving in lockstep recently.  They all moved from red to green last week, and today they are reporting increased momentum.  The good news for Energy, Telecom, and Consumer Staples is that all three erased their negative trends.  The bad news is they all continue to lag the market.

Styles

The stock market rally boosted the strength of all our style categories.  Mid Cap Growth maintains its place at the top of the list, a position it wrestled away from Micro Cap a week ago.  Micro Cap, after briefly falling to fifth, is not about to give up easily and is once again vying for the top spot.  Its rise caused Mid Cap Blend, Large Cap Growth, and Mid Cap Value to all slide one notch lower.  Small Cap Growth has enough strength to be grouped with the five categories ranked above it.  Strength begins to wane starting with Large Cap Blend and continues to drop for each of the four categories below.  Small Cap Value is in last place again, but it managed to flip from a negative to positive trend this week.

Global

Europe posted strong results this past week, allowing it to keep its top ranking among the global categories.  The U.K. performed even better than Euroland and jumped ahead of the U.S. to grab second place.  Although the U.S. slipped to third, it did so while posting strong absolute strength, as evidenced by the large momentum improvements across the sector and style categories.  EAFE and World Equity have been running neck-and-neck, and this week the advantage went to EAFE.  Canada held steady in the middle of the pack, and Pacific ex-Japan broke free of its negative trend.  Four categories remain in the red despite two weeks of strong results.  Japan’s economic growth is being called into question again, which has prevented the nation’s stock market to fully participate in the global equity rally.  Emerging Markets, China, and Latin America still lag far behind.  Latin America actually saw stock prices decline while the rest of the world rallied, suggesting it could fall even further.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“We won’t know until probably April at the earliest whether there is some change in the fundamentals” of the market because of the weather impact.

Richard Moody, chief economist at Regions Financial (2/19/14)


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