After fretting about slowing economic growth during the first few weeks of the year, investors have decided to blame the weather rather than a lukewarm recovery.
Last week was the best week of the year for the stock market, as investors responded to economists attributing a wide range of surprisingly weak data to snow and cold. Now, most of the 6 percent downturn that came in January and early February has been erased and the stock market is flirting with record levels again.
The nervousness during the past few weeks was driven by disappointing data on everything from manufacturing to holiday shopping and housing. In addition, investors feared a Lehman-type collapse in emerging markets. But investors have been calmed by economic news from China, the engine of much emerging market growth. And while many emerging markets continue to deal with financial troubles, there's been no alarming blowup like the Asian financial crisis of 1997.
"Worries about slowing manufacturing growth and weak jobs data (in the U.S.) and fragile economies in emerging markets seem like a distant memory now," said Hinsdale Associates' Director of Investments William Lynch. "Investors chose to blame the severe winter weather for the fact that industrial production was weak and that retail sales were well below estimates."
The weather is a favorite whipping boy for businesses amid disappointment. Still, it's been difficult to blame the weather for consumers' hesitancy to buy when online shopping and purchases in stores have been below expectations. You'd think people curled up under blankets would be shopping on computers or tablets at home. Online purchases during the holidays climbed substantially over the previous year's, just not as much as anticipated.
In addition, Tuesday's plunge in homebuilder optimism didn't focus only on the blizzard belt. People have been hesitant to buy homes in warm, western areas, too, as prices and mortgage interest rates have climbed, and bankers have remained reluctant to lend to anyone without pristine credit.
The homebuilder index, which showed large declines in purchases and traffic in all regions, showed the largest drop in the West. Besides weather, homebuilders said they were concerned about the cost of supplies and skilled workers.
"Figures related to consumer spending have been particularly weak," said Russ Koesterich, BlackRock's global chief investment strategist. "On a year-over-year basis, adjusted retail sales are up only 2.6 percent, the slowest pace since late 2009."
He thinks the main reason for the weakness is "that income growth is so anemic. Disposable income is rising at just over a 2 percent annual rate, a three-year low and a pace that is barely keeping up with inflation."
In her opening comments last week as the new Federal Reserve chair, Janet Yellen said the labor market has improved, but progress is "far from complete." Those comments could have alarmed investors, given the fact that 70 percent of the economy depends on consumer spending.
Instead, "markets put a positive spin on her comments," Koesterich said.
Investors assumed that a still-weak jobs picture would mean the Fed would continue to nurse the economy along with stimulus. Investors typically buy stocks when they think the Federal Reserve will be stimulating growth.
Meanwhile, households are taking on more debt after being reluctant to do so since 2008. That can be a sign that they are more optimistic about the economy and their finances, as recent consumer confidence numbers indicate. It also could be that households have delayed large purchases like cars since jobs and incomes plunged during the recession. And they now are compelled to replace those items despite lackluster income growth.
Chris Christopher, economist with IHS Global Insight, noted that there hasn't been "positive movement" in real household income except for the top 5 percent of households.
The average car in the U.S. is more than 11 years old, and while consumers have cut back a little on auto purchases lately, their auto loan balances increased by $18 billion in 2013. That was more than the $11 billion they added to credit card debt during the year. Student loan balances increased the most, at $53 billion.
Household debt of $11.52 trillion climbed about 2.1 percent in the last quarter of 2013, still below the $12.7 trillion in the third quarter of 2008. Increases were the most subdued in mortgages, with home equity loans shrinking.
As economists try to estimate weather-related factors in the economy from ongoing trends, economist Paul Edelstein of IHS Global Insight said: "It's difficult to determine how much is weather and (how much is) underlying volatility in the economy."
He added: "We want to keep our optimism in check. 2014 is going to be better than 2013, but it is still not going to be the breakout year we are always hoping for."