How Weather Affects the Stock Market: The Winter of Our Discontent?

NEW YORK (MainStreet) — While the severe weather appears to have dampened consumer spending and stymied job growth the past few months, Wall Street remained immune.

Retailers took the brunt of the extreme weather and storms, halting consumer spending as employers and potential home buyers also took a pause.

The volatility on Wall Street has not been a surprise to many experts and is likely only temporary as the markets had already priced in the effects of the frigid weather.

"The markets are insulated," said Gemma Godfrey, head of investment strategy at Brooks Macdonald. "Markets have priced this in so there has been little downside reaction in the markets to weather disrupted data and less upside room when the weather warms."

Several weeks of lackluster economic data have been attributed to the particularly cold weather. Retail sales for February rose slightly by 0.3%, exceeding expectations of a 0.2% increase. The number of people claiming benefits for unemployment declined by 9,000 to 315,000, which was more than predicted.

The winter season has had an effect on a majority of the United States, even if some of the states did not experience snow, pushing commodity prices such as crude oil and food higher, said David Fiorenza, economist at Villanova School of Business in Villanova, Penn.

"California's lack of rain will affect its farming industry later this year with higher prices and lower outputs," he said. "Coming out of winter by April, there will still be effects of higher prices for products due to natural weather patterns. Increases in gas prices and other energy will affect spring and winter economic activity as well."

Retail sales and other economic activity will increase as the weather becomes warmer in the East and Northeast portions, Fiorenza said. The real indicator of economic growth is housing starts or building permits for residential and commercial development.

"These permits affect many sectors of the economy from new home sales involving real estate agencies and banking to all the trades involved in the building industry," he said. "Once these numbers increase, you will notice true economic activity for retail, housing, banking and the service industry catering to residential and commercial activity."

The weather has had a significant impact and has shaved several tenths of a percent of GDP, said Mark Hamrick, Bankrate.com's Washington Bureau Chief. The stock markets have "largely discounted the weather and had operated at record highs."

This season's frigid weather has not affected the stock and bond markets. Investors should focus on the ability of company to sustain growth, said Jim Wright, a portfolio manager on Covestor and chief investment officer at Harvest Financial, a registered investment adviser in Paoli, Penn.

"We still advise that investors should look at the fundamentals of the underlying companies and valuations," he said. "That is what will drive the markets over the longer term. I am not sure that we have had much a collapse in the markets this year due to weather. All-in-all, I see weather as a non-event from an investment standpoint."

The market has been in a "wait and see mode," said Jerry Webman, chief economist for Oppenheimer Funds, which manages $230 billion in assets.

"I don't think it has affected the market," he said. "The financial markets try to look beyond the day to day economic markets. Most economists see this as a temporary disruption. The economy is following normal business cycles."

Investors should look beyond the weather and when companies report their first quarter earnings, Webman said.

"Investors should not try to time entry points," he said. "The market is always going to anticipate these numbers before they become public."

Investors are seeking guidance during a volatile market and show focus on diversifying their assets, said Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management, based in Parsippany, NJ.

"Broadening out your asset allocation will allow you to weather volatility," he said. "Look outside the traditional assets and focus on commodities, REITs, convertible bonds and precious metals. We will continue to see good, but not great economic growth. Businesses will continue to do well, but there will not be phenomenal returns."

Investors should distinguish between economic data and the stock market, said Daniel Beckerman, a portfolio manager on Covestor and president of Beckerman Institutional, an Oakhurst, N.J.-based registered investment adviser.

"The colder than usual weather certainly has had an impact on the housing market and on consumer spending," he said. "While the economy has been somewhat sluggish, the US stock market has done relatively well. In fact, one could argue that the US market is reasonably priced even if economic data was a lot better."

Betting on an economic rebound would be a mistake, Beckerman said.

"The stock market and the economy are not correlated in the way that most people might think," he said. "I am seeing the biggest bargains in the stock market in areas where there is now great economic uncertainty, such as the emerging markets."

--Written by Ellen Chang for MainStreet

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