Will there be growth in the spring?

Watching the action of the markets over the past few months reminds me of the famous line from the movie Being There, where Peter Sellers, a simple gardener, gets catapulted up to a potential presidential nomination by a series of ‘movie-only circumstances.’ His most incorrectly interpreted prognostication was that ‘there will be growth in the spring.’ His gardening outlook was mistaken for an economic forecast. Stocks also struggled more in the latter part of March as investors continued to worry about whether there will indeed be better ‘growth in the spring’ after the most severe winter weather in over 30 years routinely closed businesses, cancelled trips and slowed down overall growth. While the ‘weather’ issue is being viewed skeptically by many as an ‘excuse’ for companies not meeting expectations, there was clearly an impact on the economic numbers in North America.

Whatever spin you want to put on the impact of the weather, the more recent data appears to be showing that there will be better ‘growth in the spring.’ The ISI Homebuilders Survey increased this week to 60.2, its highest reading since 2005! At the same time, the ISI Truckers Survey increased this week to 59.0, the highest reading since 2006! At the very least, this strongly suggests the economy is bouncing back from the bad weather. Consumer confidence has also picked up dramatically, with the recent reading from the Conference Board coming in at 82.3, the highest level since 2008! The chart below shows the ISI Composite Company Surveys Index. After advancing into a clear recovery in late 2012, the surveys stalled out and weakened towards the end of 2013. Since then, however, we have seen the surveys start to move back to the high end of the range. Our view is that they are ready to break out to a new, higher range. This should give support to earnings growth and provide impetus for stocks to move higher.
ISI Surveys

Outside of the weather, one of the bigger potential pitfalls seen for stocks this year has been the risk of a slowdown in Chinese growth as it moves from capital spending- based growth to consumer-based growth. Investors believe that the risks of a slowdown in growth as that giant economy transforms its structure has pushed prices of major commodities such as copper and met coal to 5-year lows. Our positive outlook is still premised on continued, though slower, growth in the world’s 2nd largest economy. The new government is committed to ‘growth above all’ in terms of their objectives. This means that they would lower interest rates or add stimulus if growth starts to fall below the targeted 7.5% growth rate for 2014.

A further concern in China has been the recent failure of some private company debt offerings, including a solar producer and small real estate developer. This is part of the Chinese plan to reduce leverage in the financial sector by allowing some ‘non-performing loans’ to fail. This is not, in our view, indicative of what is going on in the economy and is not, in our view, a “Lehman moment” for their financial markets. The government is trying to reduce excessive lending to poorer quality enterprises and allowing some of those to go bankrupt is just part of the plan. The ‘shadow banking’ sector is small compared to the ‘official banking’ sector, which is itself supported by massive amounts of government liquidity and a very high domestic savings rate. This is not another ‘canary in the coal mine’ like the Bear Stearns default was for the financial crisis in 2008.

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