Breakout

With 'Weather-Maggedon' behind us, stocks look to 2nd half growth

Jeff Macke
Breakout

It should come as no surprise to anyone with the physical ability to sense temperature that the first quarter of 2014 was slow as far as the economy was concerned. When a long cold winter meets a slow-growth economy, activity freezing to a halt is the only reasonable forecast.

The meteorological fact of the horrendous climate is the best explanation for why Wall Street seems to be drawing strength from the ongoing drumbeat of downcast news from corporate America. Barely half of the companies that have reported so far managed to beat famously low-balled revenue forecasts and earnings are little better. Unless there are dramatic beats lurking out there, Q1 2014 will be the first time growth has contracted since 2012.

Stocks aren’t just taking the news in stride but are actually rallying in the face of the bad news. After looking poised to collapse in the first week of April the market turned when the reports started. In the attached clip Janney’s Mark Luschini says analysts are buying the bad news in anticipation of better days later this year.

“The economy is showing signs of improvement now that weather-maggedon has passed,” he explains. “We expect to see accelerating growth over the balance of 2014.”

The best criticism of the rally since 2009 is that it’s been pricing in earnings growth that has yet to materialize. While that’s somewhat overstated, at 15x EPS stocks aren’t that expensive, organic growth would at least make things slightly less embarrassing for bulls.

As it is Luschini says the onus is on the economy to justify a continuation of the rally, or at least prevent a stock collapse. “We’re not expecting a repeat in terms of the kind of performance in the stock market we had last year, but nonetheless we do expect a decent year in terms of share price growth.”

Luschini’s tell for the economy is the jobs picture. When it comes to the U.S. economy, all good things flow from the existence of work. With profits shrinking as employment slowly expands, we could be in one of the rare periods in which being an economist is less dreary than trading stocks.

More from Breakout:

Top defensive and offensive trades for a market on edge

Ackman, Allergan and insider trading

Ignore crash calls and buy dips: Hank Smith

View Comments (17)