The consensus investor view is that the record cold and snow will subside shortly as spring approaches (typically mid-March); however, the Polar Vortex causing record extreme weather patterns throughout the northern hemisphere may last longer than expected. According to the Advances in Atmospheric Sciences, there are two types of Polar Vortexes, one that breaks up early (mid-March) and one later. The current weather patterns indicate that the Polar Vortex will be the late ending variety. Furthermore, the current Polar Vortex is 25% larger than the previous Polar Vortex in 1985 (see map below) – stretching from the North Pole to the middle of the Gulf of Mexico.
Compounding the cold weather has been extreme snowfall. Over the past 90 years, the mid-February average amount of the United States covered by at least two inches of snow was 35%, but this year, 58% was covered (see map below). Some parts of the country that historically do not receive snow have had six inches on the ground. This expanded snow cover has had a disproportionately greater economic impact on communities unprepared for snow (i.e. Georgia and Louisiana) and is far more debilitating compared to the same amounts in areas more accustomed to snow (i.e. Chicago and Boston). In addition, The National Weather Service has concluded that the extended and significant drought on the West Coast is the direct result of the Polar Vortex.
The unusual winter is hurting the economy and increases the likelihood of negative earnings surprises. The extreme weather most directly affects consumer related companies - retailers and restaurants especially – as customers have been homebound during the storms. However, Redwood expects the impact of this weather will be more widespread. For example, travel delays have been extensive, slowing commerce across industries and delaying delivery of machinery, parts, inventory and consumer packages. Additionally, the West Coast drought is leading to higher crop and livestock prices. More importantly, this impact will last longer than investor consensus anticipates, resulting in both first and second quarter surprises. Over many months, investors will be challenged to differentiate between the impact of weather and underlying company fundamentals. For example, stocks of multiple different retailers declined when earnings were reported in February because investors could not discern if the companies missed earnings expectations due to short term weather related challenges or more sustained fundamental reasons. Meanwhile, Redwood’s investment team is busy identifying opportunities to capitalize on the weather abnormalities as media, internet related, infrastructure, auto repair, and energy companies could benefit from the environment.
Polar Vortex in White (Late February) - Source: PolicyMic
North American Snow Cover (mid-February) - Source: National Weather Service