Market Commentary 2/14/14

This week was relatively quiet from an economic data standpoint.  Jobless claims numbers were released yesterday and were higher than expected at 339,000.  The consensus estimates called for a range of 325,000 to 336,000.  Also released yesterday were retail sales data, which showed that retail sales dropped 0.4% in January,  led by auto sales and “in person” stores such as furniture and restaurants.  Investors did not seem to read too much into either economic indicator yesterday, instead attributing these “misses” to adverse weather that plagued most of the country in January.  With winter storms continuing around the country this month, we could have another month that would otherwise appear “weak” from an economic standpoint.  Our thought is along the same lines as how the market reacted yesterday.  The U.S. is having a very harsh winter from a historical perspective.  It would not be surprising for retail sales to pick up and actually surpass expectations once the weather starts improving, as often times consumers simply delay purchases until the weather improves.

Looking ahead to next week, January housing start data will be released on Wednesday and a report on January’s existing home sales will be released on Friday.  It will be interesting to see if mother nature has an effect on whether or not the housing sector is showing additional signs of improvement. 

Several key multinational companies reported this week:

Procter & Gamble (PG) cut their sales and earnings forecasts due to weaker consumer spending in emerging markets and the impact that currency devaluations could have on earnings going forward.  They lowered anticipated earnings growth to 3 to 5 percent down from 5 to 7 percent.  The revised outlook created some rippling effects through the market as investors weighed similar concerns on multinational companies.

Pepsi (PEP) missed sales estimates as softer sales in beverages offset organic growth in their snack food segment.  Through continued international growth, share buybacks, and structured cost cutting they anticipate earnings growth of 7 percent in 2014.  The company also announced they were rejecting a proposal by activist investor Nelson Peltz to spin off the North American beverage business which has continued to underperform in recent quarters.

Deere (DE) reported stronger quarterly profits but tempered forecast figures citing various challenges ahead.  The company anticipates sales of equipment could fall 3 percent this year, but believes a recovering global economy will provide solid backdrop for growth in next few years.  The longer term outlook has expectations for a growing middle class around the globe resulting in higher agriculture demand through the next decade.  

The general consensus continues to be for weaker growth in the near term with expectations for improvement over time as international and emerging markets provide global tailwinds.

Fed Chair Janet Yellen

Federal Reserve Chairman Janet Yellen pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps” and signaled that the bar is high for a change in that plan.  Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering, Yellen said in response to a question during testimony to the House Financial Services Committee. “It’s important for us to take our time to assess” the significance of recent reports showing payrolls expanded less than projected, she said.

Debt Limit Extension

Managing to avoid the usual fireworks, Republicans agreed to a one year extension of the debt limit without attaching spending reduction requirements.  This agreement effectively suspends the limit until March 2015.  This is first time since 2009 that Congress has passed a clean debt limit, hopefully salvaging time and allowing Washington to focus on other priorities. Some conservative groups expressed opposition to the measure and called it an opportunity lost to reduce government spending and address the US debt problem.


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