Russia, Ukraine, Yellen, and Your Investments Weekly Update – March 3, 2014

Stocks shook off the winter gloom and rallied for most of last week, ending February with another record high for the S&P 500. For the week, the S&P 500 gained 1.3%, the Dow rose 1.4%, and the Nasdaq grew 1.1%.[1. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-february-24-2014.htm]

The market rally faded later in the week on news that Ukraine’s political instability may lead to a fight with Russia. Russian troops moved into Crimea, an autonomous region within Ukraine, last week and appear ready to take an active role in protecting Russian interests. Ukraine plays an important part in global natural gas supplies, and traders are jittery about possible disruptions if the saber rattling escalates into outright war between the two nations.[2. http://www.cnbc.com/id/101455699]

Fed chairman Janet Yellen testified before the Senate Banking Committee this week (after winter weather delayed her visit) and largely mirrored the remarks she made before the House. She stated that the taper is likely to continue at a measured pace but emphasized that the pace is dependent on progress in the labor market and overall economy. She noted that recent softness in economic data might be attributable to seasonal weather factors and that the Fed would watch carefully to ensure that future data falls in line with long-term trends. She also assured Senate members that interest rates are likely to remain low even after the unemployment rate dips below 6.5%; Yellen made the important point that 6.5% doesn’t meet the Fed’s definition of full employment, but rather a threshold for discussions about policy changes.[3. http://blogs.marketwatch.com/capitolreport/2014/02/27/live-blog-and-video-of-janet-yellens-testimony-before-a-senate-panel/]

Looking ahead, we’ve got some important pieces of economic data being released this week. Investors will be interested in the Employment Situation report for February, which will be released on Friday. We’ll get a preview of the jobs numbers in the private sector ADP report, which will be released on Wednesday.

Analysts will also be looking for more news on the Ukraine situation. While it’s probable that any fighting would stay local, neighboring countries Poland, Lithuania, and Latvia, former Soviet territories, are members of NATO and will not welcome any Russian incursions into the region. A showdown between Russia, the U.S., and Europe over strategic interests could cause another selloff in emerging markets as investors think hard about risks. The price of oil and natural gas could rise as markets react to possible disruptions in supply.

While we’re hopeful that both sides will take a step back and ratchet down their belligerent stances, we’re not sure how it’s going to play out. However, keep in mind that U.S. investors have seen these geopolitical flash fires before. While we can’t use the past to predict the future, we can look to history for hints of what might come. Remember the shipping showdown with Iran in 2012? How about when Russia and Ukraine faced off in 2009 over a natural gas pipeline? The point is that while markets may react nervously in the short term, these flare-ups generally don’t have lingering effects on global markets. Instead of worrying too much, let’s take a moment to count our blessings and think about the suffering of those caught up in political upheaval and hope for a peaceful resolution.

ECONOMIC CALENDAR:

Monday: Motor Vehicle Sales, Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Wednesday: ADP Employment Report, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Productivity and Costs, Factory Orders

Friday: Employment Situation, International Trade

 

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Q4 economic growth revised downward. Fourth quarter 2013 Gross Domestic Product (GDP) numbers were revised down from 3.2% to 2.4% in the second estimate. The revision came after several economic factors came in under estimates.[4. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-february-24-2014.htm#ixzz2uocg6vnl]

China’s factory output sinks. Activity in Chinese factories fell to an 8-month low in February, reinforcing signs of a modest slowdown in the economy due to falling demand. The results, part of an official government survey, are in line with other third-party reports on Chinese manufacturing.[5. http://www.cnbc.com/id/101454515]

New home sales surge. Sales of new homes skyrocketed in January, reaching the highest levels since mid-2008. Sales jumped 9.6% after a sudden drop-off in December. Contracts to buy previously owned homes also edged back up in January after a stall at the end of 2013. Keep in mind that monthly figures can be volatile this time of year and analysts will want to see more data before feeling completely optimistic about the housing market.[6. http://www.usatoday.com/story/money/business/2014/02/26/new-home-sales-january/5830997/, http://www.reuters.com/article/2014/02/28/us-usa-economy-homes-idUSBREA1R13T20140228]

Consumer confidence ticks up. An optimistic outlook by younger Americans and a higher stock market pushed up the chief measure of U.S. consumer sentiment in February. While the increase was small, analysts hope that warmer weather will cause sentiment and spending to pick up in the spring.[7. http://www.cbsnews.com/news/consumer-confidence-ticks-up-in-february/]