2/5/14 – Under the Weather: Snowstorms and Economic Data

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 5, 2014 8:30:05 AM

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Recently, the weather has been blamed for poor employment figures, poor car sales, and pretty much every other lackluster economic result. Is this a legitimate explanation or just an excuse?

I’d say it’s real. People like me tend to focus on statistics rather than actual facts on the ground. Numbers are useful, but they’re not real. Thanks to my career path, I may have a better sense of this than most.

I started out as a commercial real estate developer, in the Northeast, walking through rainstorms to property auctions and wading through mud in a shopping center development site, to name two distinctive memories. Later, I was an appraiser and consultant, driving around urban Detroit to look at Long John Silver’s restaurants and rural Mississippi to view small-town retail stores, among other locations. I got a lot of experience and lots of stories. Ask me sometime over a beer.

What I did in real estate was, in many respects, the same thing I do now, but focused on a single project or market. Now, looking at a bigger picture, I necessarily have to rely on abstractions—but that doesn’t mean the real underlying factors have gone away or are less important.

Weather has reminded us of this in a big way. Employment means, at the end of the day, getting to your workplace and doing your job. If you can’t get there, maybe you won’t get paid. Looking at the different surveys, with their different methodologies, that’s exactly what seems to have happened with the bad weather in December.

Similarly, looking at car sales and home sales, snowstorms keep people home. You can’t take a test drive in a blizzard. You don’t want to walk around a property when it’s well below freezing. The economy, and every sector out there, depends on real people doing real things—and real people are affected by the weather. Adverse conditions will influence people’s decisions; the rational actor of economic theory simply does not exist. The real world impacts us all in ways that are impossible to predict in the short term, even as we can make some reasonable longer-term predictions.

Which brings us back to the stock market, and planning for bad situations. While we recognize that the weather affects the economy, over time, the effects should wash out. After all, winter will come every year, some better and some worse, but every year a winter. Failing to plan for the occasional bad winter results in poor outcomes, as we have just seen in the southern U.S.

Planning for bad times, though, necessarily entails planning for good times as well. Even as the market drops, the strong probability is that the economic indicators will recover when the weather moderates, in the next month or so. Today’s data points, for example, are more positive. Even as the market reverts to more normal valuation levels, it lays the foundation for more sustainable, rational growth going forward.

Winter fades to spring; high valuations drop to lower levels and then return higher. I may sound a bit like a cheerleader here, which is a risk I have to take, but I think it’s especially important in difficult times to maintain a view of the larger picture. Unless you’re investing solely for the short term, that’s not where you should focus.

At the same time, you have to be prepared for winter. Even though spring is coming, you need to tune up the snowblower. Investing, like life, is a balance between the two. Right now, it looks like we’re headed into a cold snap. So bundle up, and ready the snowblower, but remember that spring will be along eventually.

Upcoming Appearances

Tune in to CNBC's Power Lunch on Wednesday, February 26, between 1:45 and 3:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Check local listings for availability. 

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

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