Here we go again. Now the stock market has to deal with a new “crisis,” namely the Russian military incursion into Crimea. Let us all remember that since the start of the current bull market five years ago, stocks have had to deal with such ostensibly negative items as (in chronological order): the threat of Greece leaving the EU, the Japanese earthquake and tsunami, the first-ever downgrade of the U.S. credit rating, the fiscal cliff, sequestration, the debt ceiling battles, the Cyprus bank failures, the recent emerging market currency crisis, the start of the tapering process and now Crimea.
The point here is that despite all of these headwinds thrown in the market’s direction over the past five years, the S&P closed at its best-ever level on Friday as did both the Russell 2000 Index of small stocks and the S&P Mid-Cap 400 Index as well. What this means, once again, is that it would appear that we have a situation where the initial reaction of investors is to hit the sell button and run to the ostensible “safety” of government bonds at extremely low yields, and then miss out when equities start to reverse to the upside once things start to calm down.
The market last week was able to continue the upside momentum that it has been able to generate since the February 3 market bottom after the 5.8 percent downside correction from what turned out to be a short-lived reaction to the emerging market currency crisis that began to spook investors in mid-January as the Turkish lira, Argentine peso, Russian ruble, Indian rupee and South African rand all fell to record lows against the U.S. dollar. This allowed the S&P to rally by 6.7 percent off those lows and close at the record high level of 1859 on Friday. This meant that for the month of February it ended with a 4.3 percent advance after a 3.6 percent decline in January. It was the best such monthly performance since October and the best February showing since 1998. The Dow put in its best monthly showing since January 2013 while the Nasdaq was ahead by more than 5 percent.
The upside was motivated by the end of the fourth-quarter earnings season which has resulted in an 8.6 percent profit advance and revenue gains of 2.9 percent, and both of these numbers kept moving higher as more and more companies reported their results. In addition, there was evidence that the economy was chugging along to the upside as the negative effects of the harsh winter weather that many parts of the country experienced this year are starting to wear off, as for instance January new home sales rose by the largest amount in five-and-a-half years with a gain of 9.6 percent, the February Chicago Purchasing Managers’ Index and the final February U. of Michigan Consumer Sentiment Survey both increased by more than expected and even the reduction in fourth-quarter G.D.P. from a gain of 3.2 percent down to 2.4 percent still left the economy with a second-half growth rate of 3.3 percent versus a gain of only 1.8 percent for the first six months of the year. The main drag on these numbers, to no one’s surprise, were lower retail sales figures for both November and December.
And for the second time, the market had a favorable reaction to new Fed Chair Janet Yellen’s comments in her Congressional testimony, as her postponed appearance before the Senate Finance Committee this past Thursday resulted in market gains, although not to the extent of the dramatic upside performance during her initial testimony to the House Financial Services Committee three weeks ago. What got investors excited was when she said that the central bank could change its strategy for tapering if the economy was to show ongoing weakness. And she added that the Fed will “likely reduce the pace of asset purchases in further measured steps at future meetings” even as it takes time for the job market to recover. And similar to what she had said earlier in the month, it was not as though there was anything dramatic about her comments, but they were re-assuring to investors that policies were being continued without radical departures.
And just as the market closed on those aforementioned highs on Friday, Monday saw a large decline for the third time this year on the first trading day of a new month, and the losses have been dramatic triple-digits Dow selloffs all three times. This is unusual because the first session of a new month is traditionally to the upside as new money comes into mutual funds and pension plans and must therefore be invested. The first three starts to a month this year have all been sharply negative as the first trading day of January saw profit-taking after last year’s historic gains, the first session of February marked the end of the 5.8 percent correction, and Monday’s first market day of March saw the negative effects of the Russian military incursion into Crimea.
This could have negative implications for inflation, as Ukraine is the world’s third-largest grain exporter and corn and wheat prices have been surging lately due to the potential for shipping delays. Russia is the world’s largest oil producer and naturally crude oil and gasoline prices have been undergoing a rally to five month highs with the former at $105 a barrel. Gold has also been moving up as well and is now at $1,350 an ounce, its highest level in four months, as investors are returning to the precious metal after its 28 percent decline last year, the worst performance in 32 years. These commodity price rises are likely to appear in future inflation reports, and this could catch the attention of the Federal Reserve in terms of when it is going to start raising interest rates, and rising rates, if they do come about, have always been anathema to stock market performance.
Investors will also be faced with another jobs report on Friday when the Labor Department announces the February non-farm payroll number. Let it be remembered that the first two reports this year both came in well below expectations and there comes a limit as to how much investors are going to want to keep falling back on the “weather excuse.”
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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