By Deborah DeMatteo
Managing Director & Chief Investment Officer
It is not just the stock market that was setting some new records in February, but unfortunately for much of the Midwest and the Northeast the weather was setting new records as well. As Boston dug out of their 2nd worst winter in history, 102 inches of snow and still counting, New York to Maine set record cold temperatures— making everyday life difficult. Mother Nature’s nasty duo was not enough to slow down the financial markets; the Dow Jones, S&P 500, and the Russell 2000 indexes all climbed to new highs during the month. Let us not forget the NASDAQ coming just within a few points of its all-time high of 5000 set all the way back in the year 2000.
If record low temperatures and record high snowfalls aren’t enough to contend with for a large part of the country, go out to the West Coast and visit the docks in Los Angeles. After months of labor negotiations that have failed to be resolved, cargo ships carrying everything from produce to auto parts have lined up waiting to unload. Retailers and manufacturers paid the price as inventory failed to arrive and critical parts f o r manufacturing was not available. Honda said it would “stop or reduce production on multiple days” at six facilities over the next week because of parts shortages. Companies who are lucky enough to get their products through the ports are struggling to find independent truckers who can take their products to their next destination. Exporters are hurting too; the North American Meat Institute said its industry is losing $85 million every week while cuts of meat and poultry sit in freezers, waiting to be shipped. Our dairy producers export billions of dollars of milk products to China, Japan, and other Asian countries every year. Many companies have looked for alternative shipping routes but they are limited and expensive. The economic impact will be real, an economist speaking about the recent weakness in the Chicago Purchasing Managers Index (PMI), said “We blamed the drop in PMI mostly on the severe weather in our initial note, but a closer look suggests the disruptions at the west coast ports probably played a big role.”
On the energy front it was a busy month. As expected, Congress passed the bill for the construction of the Keystone XL pipeline, only to be vetoed by the President. The Senate was unable to get the votes required to override the veto. Ironically this came within days of a tanker train, operated by CSX, derailing in West Virginia and exploding into a ball of fire. Certainly there should be some solution to help prevent these accidents and transport materials safely. Meanwhile oil prices reversed sharply resulting in the first gain since June. Crude oil gained 18 percent, the largest monthly gain since May of 2009. As economists look for signs the consumer’s gas savings to show up in the economy, skeptical consumers are reluctant to rush out and spend their new found wealth. After decades of sudden steep declines in Oil being quickly met with a sharp and rapid increases, consumers may take some encouraging and several months of lower prices before they are convinced they can change their habits.
In economic news, the Central Bankers were busy reassuring the markets that they are guiding the economies around the world to a successful recovery. European Central Bank Chairmen Mario Draghi made good on his promise of quantitative easing, announcing an even greater stimulus package than expected. As Europe struggles to avoid a recession and Greece once again needed a bailout, many individuals question the impact of quantitative easing will have in Europe. The Chinese even surprised the market with an interest rate cut following inflation dropping from 1.5 percent to .8 percent, the lowest level since November 2009. In the data, it was revealed that producer’s prices have been falling in China for three years, the longest period on record. Our own Federal Reserve Chair Janet Yellen faced Congress in February for her semiannual report to both the House of Representatives and Senate defending the Central Bank policies and providing future outlook. As the Fed readies markets for future rate hikes, they walk a fine line between waiting too long and acting too soon. While the economy continues to show signs of strength, you cannot ignore fourth quarter GDP at only 2.2 percent, well below the estimate of 2.6 percent. The slower than expected growth does not line up with the sub 6 percent unemployment and the lack of any inflation. The Fed has to weigh the data alongside lower oil prices and worldwide lack of growth. I am sure we will hear a lot more from our Fed and other Central Bankers as we move closer to an actual tightening.
We are now in positive territory for the year and only weeks away from spring. The oil markets have calmed down, investors seem much more complacent as indicated by the drop in the volatility index (VIX), earnings season is coming to a close with relatively satisfying results, and the tenyear treasury rates are back above 2 percent. Unfortunately, none of this provides any insight in what March will bring, however, our present allocation addresses not only the optimism of an improving economy, but the lack of long term visibility.
Enjoy a happy and safe St. Patrick’s Day!