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Why the Weather Won't Hold Back the Dow

By Dan Caplinger - Mar 25, 2014 at 4:30PM

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Many have feared that the cold winter would hurt the U.S. economy, but we got news to the contrary this morning. Find out more about it here.

On Tuesday, the Dow Jones Industrials ( ^DJI 0.10% ) managed to do what they couldn't yesterday: hang on to early gains and post a solid advance on the day. In this case, the average gained almost 100 points. Even so, investors have adopted increasingly somber assessments of the Street's ability to keep climbing into its sixth year of the bull market. As earnings season looms, cold winter weather promises to be a drag on earnings for many companies, especially in the consumer goods sector. But this morning's news from the Conference Board makes it clear that at least in the eyes of ordinary Americans, weather should have only a fleeting impact on the overall economy. Many Dow stocks, including Home Depot ( HD -1.19% ), Disney ( DIS 1.68% ), and Nike ( NKE -0.61% ), should benefit accordingly.

What the Conference Board report said
The Conference Board's Consumer Confidence Index measures what consumers believe about the state of the economy. It does so by combining two sets of opinions: one reflecting how consumers perceive current conditions in employment and the business world, and the other looking forward by six months to see what consumers expect with respect to their employment and income, as well as general business conditions. Because there are three questions related to future conditions and two questions on present conditions, the overall Consumer Confidence Index reflects a 60/40 split between the Conference Board's Expectations Index and its Present Situation Index.


Source: Flickr / Tax Credits.

Forward expectations showed solid gains, with definite improvement in expectations about future business conditions. The labor market was also seen stabilizing, while more consumers anticipated that incomes would stay stable. By contrast, readings on current conditions were somewhat mixed, with gains in business conditions only partially offsetting weaker views on how difficult it is to get a job. In sum, consumers are looking forward to a better tomorrow.

What confidence means for the Dow
When consumers expect better conditions, they'll often spend in anticipation of them, and that could spell good news for the companies that are most likely to have taken hard hits in the first quarter. Home Depot is the most obvious example, as it suffered from a long winter that delayed most consumers' planning for the home improvement retailer's key spring season. As long as consumers expect better times ahead, though, sales should bounce back sharply in the second quarter, reawakening growth.

Although the seasonal factors work out somewhat differently, both Disney and Nike can expect to benefit from the rising consumer trend as well. Nike's stock crumbled even after a solid earnings report, but the earnings headwinds coming from negative currency impacts aren't affecting the fundamental growth story for the shoe and athletic-apparel retailer. Similarly, Disney stands to benefit from consumers having more disposable income to spend on theme parks, movies, and associated merchandise.

Hundreds of companies will inevitably bring up the weather in their first-quarter earnings reports in order to justify performance shortfalls. In the long run, though, companies won't be able to blame the weather if they can't thrive in an environment in which consumers are increasingly confident.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$35,754.75 (0.10%) $35.32
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$153.34 (1.68%) $2.53
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$411.25 (-1.19%) $-4.93
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$170.25 (-0.61%) $-1.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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