Harsh Winter Impacts the World Bank’s Forecasts

The latest S&P 500 winning streak was broken last week, although the size of the decline indicates nothing more than normal market action. Moreover, it looks like the stock market could actually benefit from a correction. In fact, we haven’t had a correction (typically defined as a decline of 10 percent or more) in more than two and a half years. The S&P has been moving higher without significant interruptions since fall 2011. No complaints here, of course, but a pause would be a welcome one as it could help bringing fresh money into the market.

Earlier this month, the markets got a boost from European Central Bank actions and the central bank's plan to institute negative interest rates and supply banks with a €400 billion liquidity slush fund, plus from economic data here in the U.S.

The U.K. economy has likewise shown strength, rising above its level before the global financial crisis set in, and now sees the back of the longest period of below-peak British output in 100 years. Britain’s National Institute of Economic and Social Research estimates that its gross domestic product increased 0.9 percent in the three months ended May 31, roughly 0.2 percent more than its level in January 2008 at a time roughly parallel with the start of the crisis. Among the Group of Seven nations, only Italy’s economy still stands below its pre-recession level.

Growth concerns still pressure the U.S. market, where valuations have risen to 16.5 times its members’ projected earnings, an increase from the level of 14.8 times expected earning recorded in early February.

The impact of extreme weather earlier this year is

still being felt, according to the World Bank’s Global Economic Prospects report. The weather-related slowdown in the U.S. contributed to lowered expectations here; for the year, our economic growth was downgraded from 2.8 percent to 2.1 percent.

Overall, developed economies are expected to grow by 1.9 percent in 2014, with growth accelerating to 2.4 percent in 2015 and 2.5 percent in 2016. Developing countries’ growth expectations for this year have also been downgraded, to 4.8 percent, from the previous estimate of 5.3 percent, with expected improvement later, to 5.4 and 5.5 percent rate of growth in 2015 and 2016.

Back in the U.S., we see more mixed data, although they still continue to point to the improving economy. The Commerce Department reported on Thursday that retail sales rose 0.3 percent in May, less than the 0.6 percent increase that Wall Street analysts expected, but at the same time, federal statisticians revised April sales to show a 0.5 percent gain. In other words, overall forecasts remain positive.

Still, with central bankers committed to easing policies, we don’t foresee a significant correction unfolding here; as always, we’ll keep you posted as events and indications develop.