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Global Investment Strategy

March 30, 2015 (Weekly Update)

Luis Alvarado, Global Research Analyst

Weekly market insights from the Global Investment Strategy team

  • Although this year’s winter was unusually cold and snowy in many parts of the U.S., we are not expecting such dismal U.S. economic performance for the first quarter of 2015.
  • Yet, we have noticed that several recent economic indicators are suggesting some near-term slowness in domestic economic activity.

What it may mean for investors

  • We expect that lower energy prices will continue to be beneficial for the economy, offering consumers the benefits of more purchasing power and disposable income. Lower inflation, owing to lower energy prices and a stronger U.S. dollar, should provide a boost to consumer and business spending.

Even the U.S. Economy Can Catch a Cold

During the first quarter of 2015, the U.S. experienced yet another year of unusually frigid temperatures, mainly across the Midwest and Northeast parts of the country this time. Over the past few years, such harsh winter weather has impeded U.S. economic activity during the first quarter of the year, most notably last year when it led to real U.S. gross domestic product (GDP) declining 2.1 percent. Fortunately, winter quickly turned to spring, and the U.S. economy successfully recovered from its first-quarter setback, mainly due to strong performance in the second and third quarters.

Even though this year’s winter was unusually cold and snowy in many parts of the country, we are not expecting such dismal U.S. economic performance for the first quarter of 2015. Nevertheless, we have noticed that several recent economic indicators are suggesting some near-term slowness in economic activity. An additional factor for investors to take note of this year is the effect that the West Coast ports "strike" could have on first-quarter growth. This week I discuss some of the latest economic data and implications for economic growth prospects through year-end.

This month’s data has the winter weather doldrums all over it

U.S. Manufacturing and Services activity, as measured by the Institute of Supply Management surveys, showed a continued slowdown particularly in business activity, production, and new orders. Moreover, according to survey respondents: the West Coast ports slowdown added further constraints and uncertainty to business operations. Although both indicators remain in expansion territory, they have moderated. Last Thursday, however, the preliminary data readings showed a slight uptick which we believe may be a signal of what's coming in the next few months.

U.S. Retail Sales declined in February, for the third-consecutive month, coming in at -0.6 percent month over month, pulled down by harsh winter weather across much of the country. Not all sectors displayed a decline, however, for example, non-store retailers (which include online sales) reported a 2.2 percent increase in February, the sector’s largest gain in 11 months. Our expectation is that February’s loss of retail sales will be regained in the coming months.

Durable Goods Orders were down 1.4 percent in February, and January’s figure for new orders was revised significantly lower to 2.0 percent. Although this indicator is notoriously volatile, the concern about weakness in durable goods is that it may signify the U.S. economy is slowing and consumers may be spending less than they were in the previous quarter. The downward revision in new orders suggests moderate business investment in the near term.

Housing starts along with existing home sales have been hit by the inclement weather slowing down activity since the beginning of the year, mostly affecting existing home sales in the Northeast, while in the Midwest they have remained flat. We believe that as the spring thaw takes hold, more housing inventory will be added to the market. Low mortgage rates and an improvement in income prospects for homebuyers should benefit the housing-market expansion this season.

Consumer Sentiment displayed minor hiccups in February, but as the U.S. job market continues to thrive, consumer confidence levels (both the University of Michigan and the Conference Board’s measures) are near cycle highs, and well above last year’s readings.

Chart 1: In February U.S. Consumer Confidence Reached a Post-recession High
 Chart 1: In February U.S. Consumer Confidence Reached a Post-recession High
Source: Bloomberg, 03/27/2015

Healthier prospects ahead

We believe that U.S. consumer activity, often considered a key driver of the economy, will continue to fuel global growth throughout 2015. We are starting to observe higher levels of consumer and business confidence that should be instrumental in turning around economic performance in the second quarter. The improving labor market and robust employment gains should continue to support economic growth, and we expect more focus will be placed on wage growth—a missing pillar so far in this six-year recovery. According to the Federal Reserve, U.S. household net worth rose to $82.9 trillion during the fourth quarter of 2014. The lift to consumer spending from the wealth effect—including increases in housing prices and the stock market—that we have observed in the initial phase of the current cycle, may soon be complemented with a wage-increase effect as we enter the next phase of the recovery.

Meanwhile, we expect that lower energy prices will continue to be beneficial for the economy, offering consumers the benefits of more purchasing power and disposable income. In addition, low mortgage rates along with an increase in building permits and housing starts and lean inventories should support the housing sector as we approach the spring season. Lower inflation, primarily as a result of lower energy prices and a stronger U.S. dollar, should also provide a boost to both consumer and business spending.

All data for this report was sourced from Bloomberg Finance, LLP, unless otherwise noted.

Luis D. AlvaradoLuis D. Alvarado

Luis D. Alvarado is a global research analyst for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

In his role, Mr. Alvarado researches and analyzes economic and market trends for the investment strategy team. He contributes to many WFII publications including Quick Market Updates, white papers, and special reports. In addition, he maintains the WFII library of economic and market charts. Mr. Alvarado joined the investment strategy team in 2012 from Wells Fargo Advisors where he served as a client service associate, supporting the sales and trading functions for brokerage clients. Prior to Wells Fargo Advisors, Mr. Alvarado worked as a personal banker in Los Angeles.

In addition to his professional responsibilities for WFII, Mr. Alvarado serves as co-chair for the Wells Fargo Latin Connection Bay Area Team Member Network and vice president of membership for Stagecoach Speakers, a Wells Fargo Toastmasters Club in San Francisco. Mr. Alvarado earned a Bachelor of Science in Business Administration from the Universidad de Costa Rica and a Master of Science in Financial Analysis from the University of San Francisco. In 2014, he was named as one of Forbes "30 under 30: Finance," a list that honors "men and women who are already making their mark at leading investment banks, hedge funds and other financial firms." He is located in San Francisco.

*As of Sept. 30, 2014

Disclaimers

Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The report is not intended to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name use by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company.

 
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